For the past few years, many have speculated on whether the South African Revenue Services (Sars) would approach cryptocurrency exchanges directly to disclose their customers’ information. Many crypto investors believed cryptocurrencies existed outside of the reach of the revenue collector. However, this could not be further from the truth – and the proof is in the pudding.

Following the 2020 filing season, many taxpayers received an information request from Sars, asking about the cryptocurrency held (or not held) by them as well as further related details. The kicker is that these letters had been received, regardless of whether the taxpayer had actually engaged in cryptocurrency investment. While largely unfocused, in theory this approach was effective given that a mistruth or omission in a response is a criminal offence resulting in a fine or imprisonment.

Further, with an additional R3-billion allocated to Sars to improve its technological and information-gathering infrastructure, it is clear that the walls are steadily closing in on non-compliant cryptocurrency investors.

Another major development has happened in the crypto space is that Sars has reached out to South African cryptocurrency exchanges to request information on their customers in terms of section 46 of the Tax Administration Act. This provision allows Sars to require a taxpayer or another person to submit relevant material that Sars requires in relation to that taxpayer.

According to Sars, the purpose behind the request, which has reportedly been sent to AltCoinTrader, Luno and VALR, is for risk analysis and which would determine whether any further action would be taken. The information requested includes transactional information in relation to certain customers.

‘Rules of engagement’

Something that taxpayers must understand is that Sars is a creature of statute. It is bound by the rules set out in legislation and has no power to go beyond them. Any action taken by Sars must be within the confines of these “rules of engagement” and no further. This may have led to the conclusion that Sars has no teeth when it comes to cryptocurrency exchanges, which may have given some crypto investors a false sense of security.

As recent events have shown, Sars appears to be concerned at the potential for cryptocurrencies to escape the tax net and is doing something about this.

Certainly, Sars is currently embarking on a larger project to identify and pursue non-compliant cryptocurrency investors. While this does not imply that all taxpayers will now automatically be subject to a cryptocurrency audit in every case, it does mean that one can no longer convince themselves that Sars cannot see what happens in cryptocurrency exchanges.

It is well worth remembering that tax is not only levied upon withdrawal of fiat from an exchange. In other words, sales of crypto into fiat, or swapping one crypto for another or even for stablecoins, are taxable events and cannot simply be ignored because funds have not been withdrawn from an exchange. We now know that it would be foolish to assume Sars does not know about these events. Sars is empowered to investigate taxpayer information, obtained from a third party where necessary, and cryptocurrency exchanges are subject to the same laws in South Africa as everyone else. It must therefore be properly considered whether it is legitimate for Sars to request information from crypto exchanges about their clients.

Where a taxpayer has a historic liability, Sars is sure to find out when delving into their transactional records. Once this has been identified by Sars and the taxpayer has been notified, there is little recourse for that taxpayer. The only reasonable course of action is to be proactive, and those taxpayers who are at risk of being “found out” should take the cue and rectify their affairs before it is too late.