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Bitcoin and related cryptocurrencies have become increasingly popular, and continue to grow significantly in value. Cryptocurrencies are decentralised and unregulated digital currencies that can be bought and sold in exchange for recognised currencies or goods and services.

Saliently, as the South African Reserve Bank (SARB) is exclusively authorised to issue legal tender in South Africa, the SARB does not recognise cryptocurrencies as legal tender. In practice this means that creditors, who are obliged to accept Rand in settlement of their debts, are under no obligation to accept cryptocurrency in settlement thereof. Nevertheless, there is no legislation which prohibits the acceptance of cryptocurrency as payment.

The SARB has identified certain risks associated with cryptocurrencies, such as the legal uncertainty due to an absence of regulation and the potential risk of money laundering. The SARB further cautions that use and acceptance of cryptocurrencies should be at the user’s risk due to potential technological tampering or failure which could leave these digital currencies vulnerable to market volatility.

Acquisition of cryptocurrency can occur in three ways: receiving same through commercial activities as consideration for goods and services; purchase of cryptocurrency through an exchange; and ‘mining’.

The first two methods of acquiring cryptocurrency are relevant with regards to taxation.

There is no specific tax legislation in South Africa that currently addresses cryptocurrencies; however this does not mean that they are exempt from tax liability. Marcus Botha, the director of Corporate Tax Consulting at public accounting, tax, consulting and business advisory firm BDO, advises that “until further clarity and formal regulation, SARS will apply general tax principles and tax the income or capital gains that are received or accrued to a taxpayer.”

Therefore, the crucial legal enquiry will involve examining the owner of the cryptocurrency’s intention: upon the disposal of Bitcoin, taxation on the profit generated therefrom will likely depend on whether the Bitcoin was held on capital or revenue account. If any asset is retained in order to generate profit, this asset is held on capital account as an income-generating asset, and upon the disposal of the asset, any profit realised will be subject to capital gains tax. Alternatively, when an asset is held with the intention of selling same for profit, these assets are considered to be held on revenue account and consequently will be subject to income tax.

Although the precise approach that SARS will adopt is yet to play out in practice, it is likely that SARS will consider the holding of Bitcoin as being revenue in nature, being held in a scheme of profit-making. The reason for this is that any gain received from Bitcoin is realised upon disposal.

If a tax-payer objects to this approach, they would need to provide SARS with objective evidence that their Bitcoin was held for investment purposes on capital account, meaning that any profit resulting from the disposal of the Bitcoin would be subject to capital gains tax.

It is important to consider the valuation of the profits realised from cryptocurrencies. It is essential to record the Rand price at the time the Bitcoin is acquired, when purchased on an exchange. When this Bitcoin is sold for Rand or used in the purchase of goods or services, taxation will apply to the amount by which the disposal value exceeds the acquisition value. With regards to the purchase of goods or services, the market value of the goods or services acquired at the time of disposal will serve as the disposal value.

However, cryptocurrencies are unchartered and constantly developing legal terrain, and as legislation and regulations are implemented in response to increased technical understanding and practical experience with this modern and ever-evolving trade environment, the aforementioned conclusions may need to be similarly adapted and updated. For the time being, it is recommended that detailed records be kept of the Rand value of all cryptocurrency at the time of acquisition and disposal thereof, so as to be prepared for however taxation thereof eventually plays out in practice.

Prepared by:

Ashley Adriaans | Director | Dispute Resolution: Litigation & Arbitration

Nicholas Meyer | Candidate Attorney

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)

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