In a statement released on 6 April 2018, the South African Revenue Service (SARS) announced that it will continue to apply normal income tax rules to cryptocurrencies and will expect affected South African 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” it said.
Taxpayers who are uncertain about specific transactions involving cryptocurrencies are advised to seek guidance from SARS through channels such as Binding Private Rulings (depending on the nature of the transaction).
What is Cryptocurrency?
Cryptocurrency is an internet-based digital currency that exists almost only in the virtual realm. Examples of popular cryptocurrencies include Bitcoin, Ethereum, Litecoin and Ripple, amongst others. In recent years, cryptocurrencies have received growing support for its use 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 (the 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.
Therefore, following normal income tax rules, income received or accrued from cryptocurrency transactions can be taxed on revenue account under “gross income”. 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.
SARS said that 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.
SARS added that gains or losses in relation to cryptocurrencies can broadly be categorised with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences. These include:
- A cryptocurrency can be acquired through so called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. By verifying these transactions the “miner” is rewarded with ownership of new coins which become part of the networked ledger.
- Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, which are essentially markets for cryptocurrencies, or through private transactions.
- Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply.
Cryptocurrency and VAT
The 2018 annual budget review indicates that the VAT treatment of cryptocurrencies will be reviewed. As it stands today, SARS does not require VAT registration as a vendor for purposes of the supply of cryptocurrencies.