The South African Revenue Service (SARS) is intensifying its efforts to ensure compliance among cryptocurrency traders by employing artificial intelligence (AI) to detect non-compliant individuals.
In a conversation with 702, Jashwin Baijoo, who is the head of strategic investment and compliance at Tax Consulting SA, revealed that SARS has the capability to scrutinize banking records as well as obtain trading logs from cryptocurrency exchanges.
For a long time, many cryptocurrency traders in South Africa operated under the assumption that their transactions were beyond the reach of SARS. This belief has been dispelled as SARS has made it clear that it can request transactional information from cryptocurrency trading platforms.
Baijoo described the process that unfolds when SARS initiates an audit of an individual. The audit notification letter sent by SARS includes a request for a comprehensive log of all banking transactions, complete with a column for the taxpayer to provide explanations.
The presence of the original narrative from bank statements within these logs suggests that AI is being utilized to process the information. According to Baijoo, this level of detail is typically sought when SARS identifies a potential risk, although the specific nature of the risk is not disclosed to the taxpayer.
Baijoo warns that receiving such a notice from SARS should be a signal to seek legal assistance, as it indicates that SARS has identified an area of potential non-compliance. This could relate to anything from an incorrectly declared inbound payment from years past to substantial holdings in a cryptocurrency exchange like Luno.
He emphasized that SARS has the authority to access bank statements from all banks, both domestic and international, and can also review trading logs from cryptocurrency platforms. Baijoo also pointed out the importance of distinguishing between cryptocurrency traders and investors when it comes to compliance issues, as their tax obligations may differ.
Baijoo clarified the distinction between cryptocurrency investors and traders in terms of their tax implications. An investor typically acquires a crypto asset, such as Bitcoin, and holds onto it for a considerable duration with the intention of selling it as a whole unit later on. This approach, when confirmed as an investment strategy, leads to capital gains tax obligations upon the sale of the asset.
In contrast, a trader engages in frequent transactions with their Bitcoin, either trading the entire unit or portions of it. This active trading is akin to managing stock and generates a continuous stream of income. Consequently, the profits from these transactions are treated as revenue for the taxpayer and are subject to taxation at their marginal tax rate.
Baijoo also highlighted SARS’ success in integrating AI-powered automation into their processes, which enhances their ability to gather data-driven insights. This technological advancement is part of SARS’ broader compliance program. The SARS Electronic Forensic Services division works in tandem with SARS’ audit teams, strengthening their ability to conduct in-depth investigations and, when necessary, utilize the commissioner’s discretion to bypass the statute of limitations and reopen past tax periods based on these insights.
SARS has set its sights on new targets for the 2024 tax season, which commenced in early June 2024, including individuals involved in cryptocurrency trading and holding crypto-related assets. Under the South African Income Tax Act, crypto assets are recognized as financial instruments, and as such, any profits derived from them are subject to SARS’ jurisdiction.
Previously, crypto traders and asset holders were not required to declare profits from their activities. However, there is a widespread misconception within the crypto community that a “taxable event” only occurs when a crypto asset is sold, resulting in a realized profit or gain. Baijoo emphasized that any sale or disposal of crypto assets is likely to be considered a taxable event by SARS.
