THE SOUTH AFRICAN POSITION ON TAXING CRYPTO CURRENCIES

According to Wikipedia, “South Africa has a progressive income taxation system which is based on the premise that the wealthy should contribute a greater proportion towards supporting the State than the poor. By law all employers have to register all employees as taxpayers regardless of their tax liability. In terms of individual income tax, South Africans pay the 31st highest average income tax rate in the world.”

HOW DOES SA TAX AFFECT MY CRYPTOCURRENCY PORTFOLIO?

According to the South African Revenue Service (SARS), the normal income tax rules were applied to cryptocurrencies, effective from the 6th of April 2018. All traders are expected to declare cryptocurrency gains or losses as part of their taxable income. Failure to do so could result in interest and penalties.

SARS further states that the word “currency” is not defined in the South African Income Tax Act (the act). Cryptocurrencies are neither official South African tenders nor widely used and accepted in South Africa as a medium of payment or exchange. As such, cryptocurrencies are not regarded by SARS as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, cryptocurrencies are regarded by SARS as assets of an intangible nature.

To read more about SARS and the regulations regarding cryptocurrencies, please follow the link: http://www.sars.gov.za/Media/MediaReleases/Pages/6-April-2018---SARS-stance-on-the-tax-treatment-of-cryptocurrencies-.aspx

WHEN WILL INCOME TAX APPLY AND WHEN WILL CAPITAL GAINS TAX APPLY?

How are cryptocurrencies and digital assets then taxable? SARS has shared our views that Bitcoin is not a currency, but is it then seen as an asset for income tax purposes or trading stock?

SARS’ viewpoint is that cryptocurrencies can be valued to ascertain an amount received or accrued as envisaged in the definition of “gross income”. Thus, income received or accrued from cryptocurrency transactions, will be taxed on revenue account under “gross income”. Taxpayers however, are also entitled to claim expenses associated with cryptocurrency accruals or receipts — provided such expenditure is incurred in acquiring the taxpayer’s income and for purposes of trade.

Alternatively, gains accrued from cryptocurrency transactions, may also be regarded as capital in nature (the determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence).

Gains or losses in relation to cryptocurrencies can broadly be categorised with reference to three types of scenarios:

(i) A cryptocurrency can be acquired through so called “mining”.

(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.

(iii) Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore, the normal barter transaction rules apply.

Value-Added Tax (VAT)

The 2018 annual budget review indicates that the VAT treatment of cryptocurrencies will be reviewed. Pending policy clarity in this regard, SARS will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies.

For any information on cryptocurrencies and tax, please have a look at the official SARS website (http://www.sars.gov.za).

Disclaimer: Please note that the views, thoughts and opinions expressed in this post are those of the author and this does not constitute tax or legal advice.