Commonly referred to as “cryptocurrency”, crypto assets exist almost wholly in the virtual realm through the use of cryptography technology where digital representations of value are not issued by a central bank, but rather traded, transferred, or stored electronically by either natural or juristic persons for payment, investment or other forms of utility.
Whilst the legality and acceptance of Crypto assets as an official currency or medium of payment within South Africa have been widely speculated, SARS has on numerous occasions expressed its’ stance that crypto assets are, and will be, subject to normal tax rules such that the onus is on the affected taxpayer to declare any crypto-related gains or losses as part of their taxable income, on the earlier of receipt or accrual.
SARS further confirmed its view by formally defining crypto assets as a “financial instrument” in the Income Tax Act (the Act), under the Taxation Laws Amendment Act of 2018, as opposed to “currency” which would exclude crypto gains and losses from the ambit of capital gains tax (CGT). Consequently, classification as a financial instrument broadens the taxpayer’s tax consequences when seeking to transact or speculate in crypto assets.
A media release issued by SARS in April 2018 categorises crypto gains or losses with reference to three probable scenarios, each potentially giving rise to distinct tax consequences:
- “Mining” of crypto assets: the acquisition of a crypto asset by solving complex computer algorithms.
- Cash exchanges: The exchange of local currency for a crypto asset (or vice versa) by using crypto exchanges.
- Barter transactions: The use of crypto assets as a medium of exchange in facilitating transactions of goods or services.
Transaction or speculation with these assets are deemed taxable events subject to the general principles of South African Tax Legislation, specifically whether the intent of the crypto assets’ holdings is for trade or investment purposes. By virtue of this classification, it is now trite that the South African stance is that the standard tax principles and prevailing jurisprudence for determining whether an asset is considered to be revenue or capital in nature applies to crypto assets.
Generally, where a taxpayer is engaged in frequent trades related to crypto assets, the receipt or accrual of such crypto assets could give rise to income tax consequences at the applicable rate, being a maximum marginal rate of 45% for an individual and 29% for companies as defined in the Act.
Qualifying expenses, which are not capital in nature, associated with crypto assets may be deductible provided they are incurred in the production of income and for purposes of trade. Qualifying expenses may include, but are not limited to, the acquisition of the crypto asset. In such a case, crypto assets on hand at the end of a year of assessment should be accounted for as “closing stock” in terms of section 22 of the Act and valued at cost.
Furthermore, SARS appears to view the “mining” of crypto assets as revenue in nature since the taxpayer derived the asset from conducting a trade. On successful mining of the crypto asset, an immediate accrual or receipt is recognised as it will be held as trading stock until such time it is realised through a normal cash or barter transaction.
Alternatively, where a crypto asset is held as a long-term capital investment, the capital gain or loss on the disposal of that crypto asset would have to be accounted for under the prescripts of the Eighth Schedule to the Act. Similarly, qualifying expenditure associated with the crypto asset may fall within the ambit of base cost adjustment within the CGT paradigm.
Given the nature of cryptography technology and SARS’ intention to gear its audit and detection expertise towards crypto asset tracking, it is evident that there are techniques that crypto asset investments and trades can be tracked and traced.
Thus, as with all tax-sensitive transactions, failure to disclose or inconsistent treatment of crypto asset transactions will result in unfortunate and robust consequences. Interest and penalties (between 10% and 20%) on the overdue payment of any tax due from the non-disclosure of any income from crypto assets, in terms of section 223 of the Tax Administration Act, will be incurred. Moreover, should SARS obtain sufficient evidence to substantiate that the taxpayer has intentionally evaded tax, this penalty can escalate to between 150% and 200%.
While normal income tax principles apply, certain tax amendments have been introduced with the intention to prevent abuse and/or tax evasion following the compulsory disclosure of Crypto Assets which should be considered.
- The acquisition or disposal of crypto assets by an individual has been added to the list of suspect trades in terms of Section 20A(2)(b) of the Act. This amendment entails that any assessed losses are automatically ring-fenced. It is only where the circumstances stated in section 20A(3) of the Act (commonly referred to as the “facts and circumstances” test) are met, that this ring-fencing falls away.
- With the definition of financial instruments being extended to include “any crypto asset”, taxpayers should be mindful of the anti-avoidance provision set out in paragraph 42 of the Eighth Schedule to the Act, which disregards any capital losses incurred due to the re-acquisition of an asset within a prescribed period.
From a VAT perspective, the definition of exempt “financial services” in the VAT Act was amended to include the issue, acquisition, collection, buying or selling, or transfer of ownership of any crypto asset, hence trading in crypto assets does not give rise to VAT. However, goods and services related to such tradings may well give rise to VAT, should the VAT registration threshold be met.
With the increasing importance of crypto assets in today’s financial landscape, investors and traders alike should be conscious of the risks associated with these assets and consider the related tax consequences carefully.
For more information on this, contact your local
Moore firm for industry-leading tax advice.