1. Background:
Bitcoin use has surged in South Africa amid political and economic instability in the country, where it can be used to transfer money without restriction due to sanctions or going through a bank. But Bitcoin is just one of many cryptocurrencies that are unregulated. They are decentralised digital currencies that can be bought, sold and traded. Risks associated with cryptocurrencies, includes an increased risk of money laundering and the legal uncertainty caused by the lack of regulation, vulnerability of the holder due to market volatility and the potential for technological failure or tampering.
The unregulated nature of bitcoin came to the notice of the South African Revenue Service (SARS) agency which subsequently led to an investigation into the tax consequences of the technology. The South African Revenue Service (SARS) released a statement on April 6, 2018, making it clear that, even though the country does not consider cryptocurrencies a legal tender, there would still be taxes on the gains. Thus South Africa has joined a growing list of countries that expect citizens to pay income tax on their cryptocurrency earnings.
2. Legal qualification of Cryptocurrency:
Cryptocurrency is not a legal tender:
The statement released by SARS went into great detail to provide a legal classification for cryptocurrency in the country. According to the statement, there is no definition of the term “currency” within the country’s Income Tax Act.
Section 24I of the Income Tax Act defines local currency as “currency of the Republic” and foreign currency as: “any currency which is not local currency”. It is thus clear that Bitcoin is not local or foreign currency and therefore not currency.
The South African Reserve Bank (SARB) in the Position Paper on Virtual Currencies 2014 maintains that cryptocurrencies are Decentralised Convertible Virtual Currencies (DCVC’s) which are not regarded as legal tender. This is mainly due to the authorisation power of the Bank to issue legal tender. This means creditors are not obliged to accept cryptocurrencies in settlement of debts as they are obliged to accept rand.
Classifying the Cryptocurrency as Asset:
Cryptocurrencies are regarded by SARS as assets of an intangible nature. Therefore, an asset, for tax purposes, specifically excludes currency.
Paragraph one of the the eight schedule of the Income Tax Act defines an asset as:
“property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum and a right or interest of whatever nature to or in such property”
Section 1 of the Income Tax Act defines trading stock as:
“anything produced, manufactured, constructed, assembled, purchased or in any other manner acquired by a taxpayer for the purposes of manufacture, sale or exchange by the taxpayer or on behalf of the taxpayer “
Trading stock is also classified as an asset.
Consequently, it categorised cryptocurrency as an “intangible asset” for income tax or CGT purposes.
Valuation of “gross income”:
Whilst not constituting cash, cryptocurrencies can be valued to ascertain an amount received or accrued as envisaged in the definition of “gross income” as stipulated in the Income Tax Act. Thus, the income received or accrued from transactions involving cryptocurrencies can be taxed under gross income which also constitutes the fair market value of the cryptocurrency.
3. Taxation Rule:
SARS did not see a need for new tax laws to be created for crypto-currencies as the existing rules covering “intangible assets” could be applied.
South Africa’s tax agency has told taxpayers that cryptocurrency-related income will fall under normal tax rules and may also be liable for capital gains tax. For tax purposes it must then be established whether Bitcoin will be treated as income or revenue.
The income tax act is clear on this area as it is well established.
If an asset is held as a long term investment it will be taxed as a capital gain. A taxpayer will be deemed to have held Bitcoin as a capital asset if the taxpayer’s intention in acquiring, storing, disposing or exchanging Bitcoin is a capital intention and remains as such throughout the period that Bitcoin is held, and there is no profit-making scheme present and no factors indicating a scheme of profit-making are present. In which case, the taxpayer will include in his or her taxable income any capital gain calculated under the Eighth Schedule to the Act.
If the asset is for short term trading (speculative) purposes it will be regarded as trading income.
If the intention of the taxpayer is to obtain Bitcoins for the purpose of profit-making, the Bitcoins will be considered “trading stock” and of a revenue nature. In this case, the taxpayer must include such receipts in his or her taxable income.
Different Tax consequences based on gains/losses:
The service categories cryptocurrency gains or losses according to the following three types, each of which potentially gives rise to distinct tax consequences:
Crypto-related gains or losses can occur through mining or trading, purchasing cryptocurrency at exchanges and their usage as payments in transactions.
a. Cryptocurrency obtained in a process of mining.
- A cryptocurrency can be acquired through so called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. By verifying these transactions the “miner” is rewarded with ownership of new coins which become part of the networked ledger.
This gives rise to an immediate accrual or receipt on successful mining of the cryptocurrency. This means that until the newly acquired cryptocurrency is sold or exchanged for cash, it is held as trading stock which can subsequently be realised through either a normal cash transaction (as described in (ii) or a barter transaction as described in (iii) below.
b. Cryptocurrency obtained from cryptocurrency exchanges.
(ii) Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, which are essentially markets for cryptocurrencies, or through private transactions.
c. Cryptocurrency obtained from exchanging goods and services (or vice versa).
(iii) Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply.
Transactions or speculation in cryptocurrency is subject to the general principles of South African tax law and taxed accordingly.
No Separate interpretation:
The SARS acknowledged that it faced many calls from the public to provide direction on how to treat cryptocurrency tax reporting but says that a separate interpretation is unnecessary for now. Instead it tried to explain how it falls under the current framework.
According to the tax agency, the choice of tax framework to be used, income tax or capital gains, will be determined by existing jurisprudence.
No anonymity in Bitcoin trading:
SARS said people who accept bitcoin as payment have to declare it as taxable income.
Traders who make profits by buying low and selling high are also included in these measures.
The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties.
This is considered as a measure of taking the anonymity out of Bitcoin to ensure those who purchase it pay their dues.
Guidance from Binding Private Rulings:
SARS has stated that if taxpayers are uncertain about specific transactions involving cryptocurrencies, they may seek guidance from SARS through channels such as Binding Private Rulings (depending on the nature of the transaction).
Registration as a provisional taxpayer:
The person may be liable to register as a provisional taxpayer if the total taxable income received exceeds the tax threshold for the financial year.
The income or market value thereof forms part of total taxable income derived by the taxpayer in respect of the year of assessment for which the provisional tax is payable.
Acceptable proof of purchase and sale price:
Conventional receipts and /or invoices will suffice.
Determination of Purchase price:
The purchase price is determined on the date of the earlier of receipt and accrual. Cryptocurrency is not regarded as a share and therefore SARS does not treat it as the average for the year.
Non-inclusion of VAT :
The tax agency clarified that it would not include a value-added tax (VAT) for cryptocurrency sales although the policy will come under review during the 2018 annual budget.Thus SARS will not require VAT registration as a vendor for purposes of the supply of crypto-currencies.”
Entitlement to claim expenses:
SARS also included a provision for claiming expenses related to cryptocurrency activities. Taxpayers can claim such expenses if the expenditure is related to the production of the person’s income or for trade purposes.
Gains from cryptocurrency-related investments and holding ‘may be regarded as capital in nature’ in certain scenarios while taxpayers are also entitled to claim expenses and deductions from cryptocurrency accruals or receipts.
4. Criticisms:
Increased Onus on taxpayer to determine owner’s intention:
The taxation of a profit made on the disposal of bitcoin is likely to depend on whether the bitcoin was held on revenue or capital account.In determining this, the law looks to the owner’s intention.
Taxpayers, on whom the onus rests, would be required to present objective evidence to SARS to either prove it is capital or revenue in nature.
It can be complex exercise to determine the intention of a taxpayer as to whether the asset was purchased as a long term investment or for trading purposes.
A notable extract from Elandsheuwel Farming (Edms) Bpk v SBI 1978 (1) SA 101 (A), 39 SATC 163 states: “…the question…turns on the further enquiry as to whether the sale amounted to the realisation of a capital asset or whether it was the sale of an asset in the course of carrying on a business or in pursuance of a profit-making scheme”. And this appears to be where a difficulty will arise on the Bitcoin front.
Removing Anonymity can hurt Bitcoin market:
SARS proposed to remove anonymity from Bitcoin to ensure that those who buy it pay their share. This will potentially be a hurdle for SARS, given that the appeal of Bitcoin is the freedom to trade without necessarily trading your name as well.
Regulation Issues:
Without tighter regulations, it will be difficult for SARS to hold individuals to account, and it will have to rely on taxpayers accurately and honestly identifying the tax consequences in their annual tax returns.
5. Conclusion:
The article tried to give another dimension to the legal qualification of cryptocurrency which has varied tax consequences in South Africa. This can help to clarify the status of cryptocurrency for the time being but could face difficulties in absence of any interpretation guidelines. As the global understanding of cryptocurrencies is constantly developing, technical know-how and experience is needed to navigate this new legal landscape. Thus there is an urgent need for the tax community to understand the complexity associated with cryptocurrency in different jurisdictions, in order to arrive at an internationally agreed standard for the same.
References:
https://businesstech.co.za/news/banking/223212/bitcoin-the-tax-question-in-south-africa/
https://ice3x.co.za/tax-and-cryptocurrencies-in-south-africa/
https://www.ccn.com/declare-cryptocurrency-gains-or-losses-south-africa-tells-taxpayers/
https://www.iol.co.za/personal-finance/youre-liable-for-tax-on-bitcoin-gains-11508366
International Tax Panorama 
Leave a comment