Increased attentiveness and speculation regarding the future of cryptocurrencies has prompted calls for the South African Revenue Service (SARS) to provide direction as to how cryptocurrencies should be treated for tax purposes. However, there is an existing tax framework that can guide SARS and affected taxpayers on the tax implications of cryptocurrencies, making a separate Interpretation Note unnecessary for now.
SARS will continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income. 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.
Cryptocurrency (typified by Bitcoin) is an internet-based digital currency that exists almost wholly in the virtual realm. A growing number of proponents support its use as an alternative currency that can pay for goods and services much like conventional currencies. In South Africa, the word “currency” is not defined in the Income Tax Act. Cryptocurrencies are neither official South African tender 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.
Whilst not constituting cash, cryptocurrencies can be valued to ascertain an amount received or accrued as envisaged in the definition of “gross income” in the Act. Following normal income tax rules, income received or accrued from cryptocurrency transactions can be taxed on revenue account under “gross income”. Taxpayers are also entitled to claim expenses associated with cryptocurrency accruals or receipts, provided such expenditure is incurred in the production of the taxpayer’s income and for purposes of trade.
Alternatively, such gains may be regarded as capital in nature, as spelt out in the Eighth Schedule to the Act for taxation under the CGT paradigm. Determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence. Base cost adjustments can also be made if falling within the CGT paradigm.
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.
Should you require further information please do not hesitate to contact us for professional advice in this regard.