We have investigated the electronic structure of Sr2IrO4 using core-to-core resonant inelastic x-ray scattering. The experimental spectra can be well reproduced using ab initio density functional theory based multiplet ligand field theory calculations, thereby validating these calculations. We found that the low-energy, effective Ir t2g orbitals are practically degenerate in their crystal-field energy. We uncovered that Sr2IrO4 and iridates in general are negative charge transfer systems with large covalency and a substantial oxygen ligand hole character in the Ir t2g Wannier orbitals. This has far reaching consequences, as not only the on-site crystal-field energies are determined by the long-range crystal structure, but, more significantly, magnetic exchange interactions will have long-range distance dependent anisotropies in the spin direction. These findings set constraints and show pathways for the design of d5 materials that can host compasslike magnetic interactions.