DeFi Interest / Rewards
Decentralized Finance (DeFi), often viewed as a utopian land of finance, is the new age of finance, where third parties are eradicated and trust is placed into the smart contracts holding up blockchains, instead of a centralized organization or company.
PayPal is a perfect example of a traditional financial intermediary which may suffer from greater DeFi adoption.
DeFi creates a trustless and permissionless environment that cannot discriminate based on socio-economic factors such as identity or race.
Remember: The DeFi ecosystem does not require any KYC information. Therefore SARS requires crypto investors to declare their crypto assets.
Within the DeFi ecosystem are different protocols and platforms offering interest gathering services, such as staking and yield-farming through Liquidity Pools. Users will receive rewards for providing liquidity to different pools throughout DeFi which help users anonymously exchange, lend and borrow crypto assets.
How does SARS expect DeFi protocol interest and rewards to be treated: as income or tax-free?
Basing our assumptions on previous rules written by SARS:
- DeFi interest is the equivalent of bank interest, which is treated as taxable income.
Therefore, it is likely income tax will apply, relative to your tax bracket, on any DeFi interest or rewards.
It is currently unclear whether only 40% of crypto income is taxed.
Julius recently ventured into the world of DeFi, holding assets on Anchor Protocol for their high guaranteed APRs.
His R500,000 sitting in the UST pool granted him 18% APY.
After only one month, Julius pulled his entire fund out, scared about recent de-pegging news, taking his reward with him.
His total gain, R7,500 (R500K * 18% / 12) will be taxed at Julius' income tax rate band.
R7,500 * 18% = R1350 payable.