How to Know The Difference

The difference between being classed as an investor or trader is if you can convince SARS of your intentions.

Recognized as an Investor

If you want to be recognized as an investor and not a trader, many precautions can be put in place, to add weight to this argument, such as:

  • Only holding crypto assets for extended periods of time, such as 3-5 years.

  • Not participating in revenue-generating protocols like yield-farming or staking.

  • Not constantly trading crypto-to-crypto, as this will be viewed as a disposal, or crypto-to-fiat.

Most crypto asset investors in South Africa are seen as traders not investors, as their trading pattern alludes more to a transactional or β€˜trading stock’ nature in respect of their crypto-assets.

According to SARS, β€œGiven their extreme volatility, Cryptocurrencies are likely to be held as a speculative asset of a revenue nature.”

SARS will likely view you as a trader and tax you accordingly, especially if you are heavily active in income-generating protocols. On the other hand, you may be recognized as a Trader if you are active in income-generating protocols throughout the crypto-sphere and frequently break the guidelines for investors shown above. This must be determined on a case-by-case basis, and different transactions may be treated differently.

Let's run through some examples to assume how SARS may view different transactions throughout the crypto-world:

Example 1: Seen as an Investor

Louis is a recent crypto-enthusiast and has been dollar-cost averaging into Bitcoin every week, believing that in several years to come, his investment will have appreciated.

Having amassed Bitcoin valued at R100,000, Louis transfers his entire Bitcoin holding to his new ledger wallet to go into cold storage for five years.

Remember: Transfers between your wallets do not create a disposal and are tax-free!

After the long five years, Louis decides to check on his Bitcoin ledger. Shockingly, the value of his once R100,000 in Bitcoin has skyrocketed to R500,000, netting him a massive R400,000 gain!

We assume that Louis will be viewed as an investor by SARS, not a trader, as he had clear intentions to hold his crypto-assets for the long-term and did not participate in any revenue-generating protocols. He is entitled to dispose of these capital assets and realise a capital gain to their best advantage.

Example 2: Seen as a Trader

Louis' brother, John, got into the crypto-sphere around the same time as Louis, hoping to make gains from smart investments. Not happy with Louis' small and often boring approach to investing, he decides to split his portfolio into two:

  • Half of his portfolio in Anchor, making 20% APR returns on his crypto assets

  • The other half invested in Ethereum.

After making a quick 20% gain on his Ethereum, John decides to sell and re-invest into a new token that has just completed its ICO.

During the five years that Louis is holding his Bitcoin, John repeats this process several more times, increasing the value of his portfolio by 300% over the same period that Louis realized a gain of 400% from holding his Bitcoin.

As John was extremely active in his investments, we must assume that SARS will view John as a trader, not an investor, and be taxed accordingly. At the same time, he will be taxed at the normal tax rates on the APR returns from his Anchor investment, but the principal investment amount may be treated as capital in nature.

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