South Africa’s Bitcoin Market Reacts to Government’s Regulations, Trading Volume Falls by 10%

Amid proposed regulatory constraints, South Africa’s daily bitcoin transaction volume declined by 10%; from $258,783 to $235,470 in January. Up to $23,313 worth of bitcoin marked the difference in daily trading volume posted by investors between the start and end of January.

Crypto dealings have come under increased scrutiny by the country’s financial regulator since the $740 million bitcoin scam first reported in December last year. Investigations showed that Johannesburg based-crypto exchange, Mirror Trading International (MTI) Ltd had been fronting as a legitimate crypto trading platform but was actually operating a multimillion-dollar Ponzi scheme.

Backed by the government, the Financial Sector Conduct Authority (FSCA) has proposed stringent regulations that would make it mandatory for crypto startups to obtain a financial services provider (FSP) licence or cease operations. That was just the beginning.

Now, taxpayers must disclose all crypto-related transactions and income, including use cases to the South African Revenue Service (SARS). Defaulters would be subject to a fine or face imprisonment for up to two years.

From the outset, it should be known that all cryptocurrency transactions will bring tax consequences for a taxpayer.

Tax Consulting South Africa

“A tax disclosure obligation does not only arise where a cash balance is withdrawn from a trading platform – all transactions that have been made (whether a transaction of cryptocurrency for money or cryptocurrency for other cryptocurrency) must be disclosed to SARS.”

Recall that Technext had hinted in a previous post that severe regulations were looming for South Africa’s crypto space.

Incoming Crypto Tax Could Trigger Investor Exits

The last thing crypto traders want to deal with is regulation, let alone tax. South Africa’s 10% decline in bitcoin trading volume for January goes to show that several traders either suspended trading activity or withdrew their investments in response to the government’s clampdown efforts.

With taxpayers now required to present all crypto statements to the country’s Tax Authority, bitcoin trading volume could fall to unprecedented lows as many investors may opt out in order to avoid remitting taxes.

Crypto operations in South Africa have effectively lost their autonomy and this reduces its market appeal to investors. Add the cost implication of paying taxes and suddenly crypto becomes less attractive to traders.

Suggested read: Only 10 African Countries are Actively Trading Cryptocurrency, Why are 44 Left Out?

SARS has already suggested a capital gains tax (CGT) on crypto investments. If enforced, traders would be required to pay between 7% to 18% on profits realised. The average bitcoin trader does not want to pay any tax, which defeats the purpose of using cryptos in the first place.

A mass departure of investors is highly likely and bitcoin trading volume is projected to fall even further going forward.

Govt Wants A Share of the Crypto Pie

Despite authorities in South Africa insisting that crypto regulations are aimed at suppressing fraudulent dealings, there is, of course, the motive of getting its own cut of the country’s booming crypto market. One of the FSCA’s objectives for regulating crypto is to “combat tax evasion”.

It is feasible to understand that SARS is in the process of ensnaring culpable taxpayers who have not disclosed their cryptocurrency-related trading profits and/or losses.

Tax Consulting South Africa

South Africa processed close to $100 million in total P2P bitcoin trading in 2020, a proof of how the crypto market has grown in the past few years. Assuming a profit of $10 million was generated last year, a 10% capital gains tax equals $1 million (ZAR 15 million) in additional government tax revenue. That is not something the government wants to miss out on every year.

This time last year, South Africa was on the cusp of a crypto boom, now, it is facing a possible meltdown.