After lengthy speculation by tax experts and insightful utterances by senior South African Revenue Services (‘SARS’) staffers, the SARS has finally resolved to release a media statement regarding the treatment of cryptocurrencies for taxation purposes. We have previously explored the possible approaches SARS could employ to taxing cryptocurrency, thus this article will be limited to rehashing the essence of cryptocurrency and thereafter it shall address three points worth noting from the SARS’ media statement.
What is Cryptocurrency?
In short, cryptocurrencies are decentralised and unregulated digital currencies that can be bought and sold in exchange for recognised currencies or goods and services.
Bitcoin is the leading cryptocurrency in The Republic of South Africa and internationally and thus it is the most practical example. There are three central purposes for which an individual would attain Bitcoin. First, it can be maintained as a long-term investment. Second, it can be exchanged for goods and services online and conventional payment platforms. And lastly it can be traded for profit through an online exchange.
What to take from the SARS statement?
First Point: Conventional Tax Rules Apply
Notwithstanding that cryptocurrency does not constitute cash, SARS considers it as an amount which can be ‘received and accrued’ and thus it would fall under the definition of “gross income” as envisaged by the Income Tax Act (‘the Act’), and taxed accordingly.
Alternatively, SARS could consider any gains from cryptocurrency as being of a capital nature and tax it according to the Eight Schedule of the Act as Capital Gains Tax.
The above simply means that cryptocurrency is taxable and that depending on how it is utilised shall affect SARS’s attitude to taxation. In other words, if a taxpayer trades cryptocurrency with the intention of making a profit it shall be taxed as gross income, but if it is held as a long term asset and thereafter disposed of then a taxpayer shall be taxed on their capital gain.
Second Point: Onus To Declare on Taxpayer
SARS have not bluntly stated this fact, but they do not presently have the technological means to track a taxpayer’s crypto transactions, and therefore their ability to determine taxable income (in cryptocurrency that is) is limited. Thus until they have reached such a period they are relying on the taxpayer to declare their gains.
Thus, the onus to declare is on the taxpayer. This is not unusual, however if the taxpayer opts to not disclose any profits or capital gains attained in cryptocurrency the SARS currently have no means of verifying the authenticity of the taxpayers declaration.
Third Point: Uncertainty Remains
SARS took an exceptionally long time to officially declare their stance on the taxation of cryptocurrency and they are yet to release a practice note. This is a strong indicator that they are uncertain as to how to approach the matter, yet the pressure to provide guidance to taxpayers is increasing.
To put it directly, SARS have no idea how to tax cryptocurrency! But this conundrum is not unique to SARS, it is a global phenomenon. We suspect that it shall be a long time until any institution can regulate the economically disruptive cryptocurrency.
Fezile Nqiwa | Candidate Attorney | Banking & Finance Law
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)