On April 6 2018 the South African Revenue Service (SARS) announced that it:
- will continue to apply normal income tax rules to cryptocurrencies (also referred to as 'virtual currencies'); and
- expects affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income.
Due to the growing popularity of cryptocurrencies in South Africa and the absence of legislation concerning their taxation and regulation, SARS's decision to address this issue was widely anticipated.
In December 2017 SARS indicated that it was in discussions with leading global technology companies regarding more efficient methods of tracking cryptocurrency trades. These discussions and SARS's recent statement suggest that it is scrutinising cryptocurrency taxation and transactions.
SARS's position compared with that of foreign revenue collection authorities
Based on the taxation of cryptocurrencies in countries such as the United States and India, South Africa appears to tax cryptocurrencies in line with internationals trends.
The US Internal Revenue Service (IRS) treats cryptocurrencies as property and applies existing tax principles to cryptocurrency transactions. It follows that should a taxpayer dispose of a cryptocurrency, this will trigger either a capital gain or a capital loss. The same regime is followed in South Africa, whereby any gain or loss derived from a capital asset, such as property held for investment purposes, will be taxed in accordance with the Eighth Schedule to the Income Tax Act (58/1962). However, in the United States, should a taxpayer 'mine' a cryptocurrency, such as bitcoin, the IRS requires that the fair market value be included in the taxpayer's taxable income. This provision is similar to South Africa's tax system, which requires that an asset held on revenue account be included in that taxpayer's taxable income.
In India, cryptocurrencies are deemed to be capital assets if purchased for investment purposes. Therefore, any gain arising due to the disposal of a cryptocurrency will be taxed in accordance with the provisions dealing with capital gains – a principle which South Africa also follows and is in accordance with SARS's recent statement. However, in India, should transacting with cryptocurrencies become frequent, the taxpayer could be held to be trading in cryptocurrencies and the income generated from such trade would need to be included in the taxpayer's taxable income. Once again, this is in line with the South African tax system.
SARS has stated that cryptocurrency transactions are subject to the general principles of South African tax law. Thus, any revenue received, gains made or losses incurred in respect of cryptocurrency transactions may be regarded as:
- revenue in nature and be included in the taxpayer's income tax; or
- as capital in nature and be subject to capital gains tax (CGT) in accordance with the Eighth Schedule to the Income Tax Act.
The test to determine the nature of a cryptocurrency transaction and whether it is of a revenue or capital nature must consider:
- the taxpayer's intention when acquiring the cryptocurrency; and
- the facts and circumstances of each case.
The South African courts have decided that the primary intention when the asset has been acquired is conclusive in determining whether the asset is held on revenue or capital account, unless other factors exist and show that the asset has been sold in the scheme of profit making. If the taxpayer's intention was to obtain the cryptocurrency for the specific purpose of profit making:
- the asset will be considered to be trading stock and of a revenue nature; and
- the income derived therefrom will have to be included in the taxpayer's taxable income.
The following risks are associated with the use of cryptocurrencies:
- SARS does not view cryptocurrencies as a form of legal tender issued by the government in the form of coins or notes. As such, should companies or individuals agree to make use of a form of cryptocurrency in exchange for goods or services and something goes wrong, no legal recourse will be available.
- Security threats exist due to the lack of a central authority should a technical error arise or a transaction involve a deceitful dealer. In addition, hackers are targeting cryptocurrency accounts.
- Consumers and cryptocurrency traders should consider the unpredictability of cryptocurrencies due to:
- their lack of intrinsic value, which means that they do not sell any products, earn revenue or provide employment;
- the fact that they generally return no dividends and only a small amount of the currency's total value is used to develop the cryptocurrency; and
- the fact that they are difficult to value and decisions made to purchase cryptocurrencies are based on the market sentiment at the time.
Further, there is a lack or regulatory oversight in respect of cryptocurrencies despite government attempts to clamp down on the industry. This lack of regulation allows for market manipulation, which introduces volatility and discourages institutional investors which are unwilling to take the risk of investing in cryptocurrencies without assurance that their investment is protected and secure. Increased investment from institutional investors could soften such market volatility.
How will tax consequences of cryptocurrencies be calculated?
Since cryptocurrency transactions are subject to the general principles of South African tax law – depending on whether the cryptocurrency is held on revenue or capital account ?– an income tax or CGT calculation in respect of cryptocurrency transactions will be the same as for any other revenue or CGT calculation.
SARS has indicated that a taxpayer can deduct expenses incurred in respect of cryptocurrencies (eg, bitcoin trading tax), provided that they meet all of the act's requirements.
SARS's statement has provided taxpayers with clarity regarding the tax treatment of cryptocurrencies, placing the onus on them to declare income made in accordance with the general principles of South African tax law. Taxpayers must therefore declare income derived from cryptocurrencies in their income tax return in the year in which that income accrued. Failure to do so correctly could result in understatement penalties of up to 200% and the imposition of interest.
Despite SARS's clarification regarding the taxation of cryptocurrencies, the novelty thereof guarantees that various uncertainties remain. In this regard, taxpayers may seek guidance from SARS on the taxation of specific cryptocurrency transactions through binding private rulings.
For further information on this topic please contact Candice Gibson at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email ([email protected]). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.
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