The South African Revenue Service (Sars) will continue to apply “normal income tax rules” to cryptocurrencies such as bitcoin and has urged taxpayers to declare cryptocurrency gains or losses as part of their taxable income.
The growing popularity of cryptocurrencies such as bitcoin and ethereum and the rollercoaster ride some of these have experienced over the past year have increasingly resulted in questions about their tax treatment in the local context.
Sars previously indicated that it was in discussions with some of the top technology companies in the world to enable it to track cryptocurrency trades more efficiently.
“Increased attentiveness and speculation regarding the future of cryptocurrencies has prompted calls… to provide direction as to how cryptocurrencies should be treated for tax purposes,” Sars said in a statement on Friday.
It noted that the existing tax framework could be used to guide taxpayers on the tax implications of cryptocurrencies and that it was unnecessary to issue a separate Interpretation Note at this point.
“Taxpayers who are uncertain about specific transactions involving cryptocurrencies may seek guidance from Sars through channels such as Binding Private Rulings (depending on the nature of the transaction).”
‘Assets of intangible nature’
Sars said cryptocurrencies like bitcoin were internet-based digital currencies that existed in the virtual realm. A growing number of proponents supported its use as an alternative currency that could pay for goods and services much like conventional currencies.
However, the Income Tax Act did not define the word “currency” and cryptocurrencies were neither official South African tender nor widely used and accepted as a medium of payment or exchange in the local market.
“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 [Income Tax] Act.
“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 spelled out in the Eighth Schedule to the Act for taxation under the CGT paradigm,” it added.
Sars said whether accruals or receipts were revenue or capital in nature would be tested under existing jurisprudence (of which there was no shortage) and added that taxpayers were entitled to claim expenses associated with cryptocurrency accruals or receipts, provided it was incurred in the production of income and for purposes of trade.
The revenue authority said base cost adjustments could be made if it fell within the CGT paradigm.
“Gains or losses in relation to cryptocurrencies can broadly be categorized with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences:
- 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.
“This gives rise to an immediate accrual or receipt of successful mining of the cryptocurrency. This means that until the newly acquired cryptocurrency is sold or exchanged for cash, it is held as trading stock which can subsequently be realized through either a normal cash transaction (as described in (ii) or a barter transaction as described in (iii) below.
- (ii) 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.
- (iii) Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore, the normal barter transaction rules apply.”
According to the 2018 Budget Review, the VAT treatment of cryptocurrencies would be reviewed.
“Pending policy clarity in this regard, Sars will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies,” it said.
Sars said the onus was on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it was received or accrued.
“Failure to do so could result in interest and penalties.”