Crypto Tax Exposure: It Starts With Missing Base Cost
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A recent US tax article highlights a growing global problem: crypto investors and businesses are unable to substantiate their cost base. When that happens, tax authorities may treat the cost as zero, effectively taxing the full proceeds as profit. While the article focuses on the IRS, the principle applies just as strongly in South Africa.
The Core Problem - Possible ‘Phantom Gains’
Crypto is treated as an asset for tax purposes. In South Africa, disposals are subject to income tax or capital gains tax, depending on the facts. Your tax outcome depends on one number: your cost base. If you cannot prove what you paid, when you acquired it, and how specific units were disposed of, the claimed base cost may come under question. This can turn the entire sale value into taxable income, even if your real profit was far lower. This creates what many call “phantom gains”, a tax on profits that may not actually exist.
How Cost Base Gaps Happen
Cost base gaps are common when taxpayers:
Move crypto between wallets and exchanges
Trade token-for-token
Earn staking rewards or airdrops
Lose access to historical exchange data
Rely on incomplete third-party software.
Once transactions are fragmented across platforms and wallets, the audit trail breaks. Proceeds are visible but cost base often isn’t.
Why This Matters for You
SARS has already increased scrutiny of crypto transactions and requires taxpayers to declare crypto activity in their returns. As third-party reporting and international information sharing expand, mismatches will trigger audits. When SARS identifies proceeds without substantiated base cost, the burden shifts to the taxpayer.
At that point, the issue is no longer just arithmetic. It becomes a question of intent and credibility. Under the Tax Administration Act, this can bring understatement penalties can reach up to 200% in cases of intentional tax evasion. Criminal prosecution is possible where there is evidence of deliberate misrepresentation.
The line between poor recordkeeping and perceived concealment is often determined by the quality of documentation.
What Business Accountant Should Do
Accountants in practice should:
Ensure clients maintain transaction-level records, not just exchange summaries
Reconcile wallet transfers to confirm self-transfers versus disposals
Document cost base methodologies clearly
Review prior years where large crypto disposals were reported without strong support.
Accountants in commerce should:
Implement internal controls over crypto investments or payments
Record fair market value at date of receipt
Track lot identification and holding periods.
The Bottom Line
The US developments are a warning, not a distant issue. If your client cannot prove their cost base, they do not control their tax outcome. Crypto compliance is about risk management and accountants who address it proactively will protect their clients, their firms and their professional standing.
Source Article: Accounting Today
