Cryptocurrency, taxes and estate planning

As cryptocurrency grows in popularity, you need to make sure you bring these into your estate planning, make a trusted person aware of the fact that you own such currency, and how they can find it and pass it on to your heirs.

What is cryptocurrency?

It is a digital ‘currency’ that is not issued or controlled by a government or a central bank. It was designed in 2008 (and the first bitcoin transaction took place in 2009) when an anonymous developer, or group of developers, under the pseudonym of Satoshi Nakamoto, succeeded in creating bitcoin, the world’s first successful digital currency. Users manage this and the system is kept secure by software that anyone can download.

People can send bitcoin to each other without the need for a bank or financial intermediary, and they can store it in their digital wallets. But a wallet held on a cryptocurrency exchange is not the same as a wallet that only you can access. The wallet on an exchange is like a bank account holding money on your behalf. A bitcoin is only truly yours if it is held in your personal wallet, on your laptop, phone, or wallet device.

What is cryptocurrency mining?

Cryptocurrency mining refers to solving highly complex computational math problems (cryptographic equations) using high-power computers, for which the miner is rewarded with tokens or bitcoin. The solving process involves verifying data blocks and adding transaction records to a public record (ledger) known as a blockchain. It’s the way new bitcoins are entered into circulation, but it is also a critical part of maintaining and developing the blockchain ledger.


Regardless of how you hold the cryptocurrency, you are required to make disclosures to SARS


Despite their apparent ‘anonymity’, cryptocurrencies can be tracked because of their interaction with traditional traceable banking and payment mechanisms. They are also already under scrutiny by tax authorities, including the South African Revenue Service (SARS).

Authorities can trace bank transfers and payments by a taxpayer to and from a cryptocurrency platform. SARS has already announced that it is investing in technical expertise to track these kinds of digital footprints. It has already included questions about cryptocurrency investments in the capital gains tax portion of tax returns, creating source codes for cryptocurrency-trading profits (2572) and losses (2573). All cryptocurrency transactions must be declared – not only those when you cashed out. You must also declare if you mined cryptocurrency.


How does SARS tax cryptocurrency?

SARS does not see cryptocurrency as a currency, but rather as an asset included under the definition of a ‘financial instrument’ in the Income Tax Act. 

This means that the ‘tax’ cryptocurrency will attract in your hands will depend on whether you are an active trader in cryptocurrencies or a long-term investor. If you are an active trader, the profits you make from trading in cryptocurrency will be taxed as ‘income’ at your marginal tax rate.

If, however, you hold cryptocurrency as an investment (on capital account), and you sell or dispose of it, such gain will be subject to capital gains tax (at a maximum effective of 18% for individuals).

Regardless of how you hold the cryptocurrency, you are required to make disclosures to SARS. SARS is very clear that you also need to declare when you were paid with cryptocurrency in any way, which is taxable like any other income.


You must make your adviser aware of the cryptocurrency you own

Cryptocurrency is also treated as an asset in your estate for both executor’s fees and estate duty purposes, and it can be dealt with to an extent in your will. It would be tragic if, for instance, your estate included several bitcoins, but your financial adviser was not aware of this when assisting you with your estate planning and the drafting of your will. In such a scenario, it could increase the cost of dying (executors fees, estate duty, etc.) and accordingly could negatively impact any liquidity calculations performed during the estate planning process. 


Make your loved ones or trusted adviser aware of your ownership of bitcoin and ensure they have access to the keys


Because of the nature of cryptocurrency and the way in which an individual holds it, it could be very difficult, if not impossible for your executor to trace your holdings and properly account for them if they have not been brought to their attention. It is therefore advisable to ensure that your executor and / or family members are aware of your holdings and how to access them.


You need to ensure that your bitcoin is identifiable and accessible for your executor and beneficiaries

Unlike traditional currencies, bitcoins do not exist in a physical form. It is very technical – however, in effect, they are held on a digital ledger using ‘blockchain’ technology, a chain of digital signatures. Each owner transfers ownership to the next owner by digitally signing a hash of the previous transaction, the public key of the next owner and adding these to the end of the coin.

Most bitcoin owners have bitcoin wallets, which reflect the value of your bitcoins. In reality, however, the wallet contains the ‘keys’ to your bitcoins. The ‘keys’ are crucial for transferring ownership or spending your bitcoins. It is therefore the keys that need to be protected and practically dealt with by your executor. If a key is lost or no longer accessible, then in essence, you will have lost your bitcoin. The challenge, therefore, is to make your loved ones or trusted adviser aware of your ownership of bitcoin and to ensure that they have access to the keys.


Some practical options to consider:

  • Whatever you decide to do, always ensure that it is done safely and securely.
  • Backing up your wallet on an external hard drive and transcribing all access details for the wallet is a practical option to ensure that your executor and loved ones have access of your cryptocurrency.


Some other considerations relating to cryptocurrency

Cryptocurrency is currently unregulated in South Africa and accordingly, financial planners and wealth managers are not allowed to provide advice about this asset.  However, if you decide to go it alone (so to speak):

1. Understand what you are buying and be very careful of being lured by unreliable or unknown promises of exceptional returns.

If it sounds too good to be true, it generally is too good to be true – be cautious.

2. Be aware of the investment risks.

Cryptocurrencies are highly speculative digital commodities, and that they will continue to challenge investors with extreme price swings based on changing sentiment. Supply and demand for bitcoin drive its price, along with the adoption and technological development of the currency.

3. Don’t pay for or act on cryptocurrency ‘tips’ without verifying their legitimacy.

As the cryptocurrency space is largely unregulated, and financial planners and wealth managers are not under current legislation allowed to provide advice about this digital asset, investors depend largely on unverified social media information. This can also provide a fertile ground for fraudsters and their accomplices. It is easy to take advantage of people who do not understand how cryptocurrencies work. You can be lured into trading schemes, cloud-mining schemes, bitcoin copycats or even outright Ponzi schemes while mistakenly believing you are investing in a cryptocurrency. As a rule, you should verify the credibility of all information before you invest.


Want to know more?