Summary

Many South Africans have jumped on the cryptocurrency bandwagon in recent years, with some even making their millions in the digital realm. In light of these advances in digital currency technology, SARS has announced that cryptocurrency will be subject to normal income tax rules. SARS regards cryptocurrency as an intangible asset, and any income that is accrued or received is liable for taxation. As a consequence of these new rules, SARS expect all affected taxpayers to declare their gains and losses on cryptocurrency as part of their taxable income.

Legal Status of Cryptocurrency

SARS does not regard cryptocurrency as a currency for income tax purposes or Capital Gains Tax (“GTA”). Instead, cryptocurrencies are regarded by SARS as an asset of an intangible nature. This definition means that any income that is accrued or received from cryptocurrencies is liable for taxation and must be submitted to SARS.

SARS have joined forces with The South African Reserve Bank (SARB) to explore the flow of cryptocurrencies. SARB’s ‘FinTech’ unit has been created to investigate its standing on private cryptocurrencies.

Tax Treatment

SARS have noted that cryptocurrency will be subject to normal income tax rules, stating that “the onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year. Failure to do so could result in interest and penalties.” Following standard income tax rules, income received or accrued from cryptocurrency transactions should be taxed as part of taxpayer’s taxable income.

Alternatively, such gains may be capital in nature and be subject to Capital Gains Tax. Determination of whether an accrual or receipt is revenue or capital in nature is dependent on the taxpayer’s intention when buying, holding and selling cryptocurrencies.

Taxpayers are also entitled to claim expenses associated with cryptocurrency accruals or receipt, as a tax deduction if their expenditure is incurred in the production of income, or base cost, if the gain is recognised as capital in nature.

Classification of Gains or Losses

SARS have broadly categorised cryptocurrency gains /losses in relation to three scenarios, each of which will give rise to income tax or capital gains tax, depending on the intention of the taxpayer and facts surrounding the transaction. According to their official statement on the taxation of Bitcoin and other cryptocurrencies, SARS categorise these as;

  • Taxpayers obtain cryptocurrency through so-called mining, the verification of transactions in a computer-generated public ledger; the cryptocurrency will be held as trading stock until the newly acquired cryptocurrency is sold or exchanged for cash.
  • Taxpayers and investors can exchange local currency for a cryptocurrency or vice versa.
  • Taxpayers exchange cryptocurrencies for goods and services. This transaction is regarded as a barter transaction and normal barter transaction rules apply. Both parties are subject to incurred income tax or CGT on the value of the asset received and are entitled to claim a tax deduction on the value of the asset.

Value-Added Tax (“VAT”) Treatment for Cryptocurrencies

SARS has confirmed that the VAT treatment of cryptocurrencies will be reviewed and that supplies of cryptocurrencies would not require VAT registration as a vendor in the interim. However, the fact that suppliers of cryptocurrencies do not have to register as a VAT vendor at present has some negative consequences including;

  • Fully “taxable” enterprises will be converted to “mixed” supplies if the enterprise starts accepting cryptocurrency as a payment method. This situation will lead to VAT apportionment issues, including VAT leakage.

STT and other taxes

There is no STT tax or withholding tax applicable on Cryptocurrencies.

Significant Areas of Uncertainty

The valuation of cryptocurrencies like bitcoin remains a point of major concern. The value of cryptocurrencies is much harder to establish, as they trade on various international exchanges and price levels can differ substantially.

The status of cryptocurrencies in relation to VAT treatment is also under review and thus could change.

Important Points to Note

Once again, it’s important to remember SARS’s contention in their official statement that “the onus is on taxpayers to declare all income and gains including cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest as well as understatement penalties of up to 200%.”

Important Points to Note

Once again, it’s important to remember SARS’s contention in their official statement that “the onus is on taxpayers to declare all income and gains including cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest as well as understatement penalties of up to 200%.”

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