Tax Implications for Cryptocurrency holders
SA Revenue Services viewpoint on the Tax implications for cryptocurrency holders
The tax implications on cryptocurrency investments is a widely discussed subject. Governments all over the world have made statements. Few have made any credible laws or rules specific to cryptocurrencies. In South Africa, SARS (the South African Tax and Revenue Service), have done the same. They have however also made some clarifications.
The trading community welcomes this type of statement, but some statements may have far-reaching implications. Many professional firms are weighing in with opinions, but there seems to be few that grasp the concept of a wealth creation mechanism. You simply cannot force a cryptocurrency to have the control properties which we find in FIAT money …. unless you can control the private keys.
SARS’s Stance on the Tax Treatment of Cryptoцurrencies
The South African Revenue Service will continue to apply normal income tax rules to cryptocurrencies. As there are a few tax implications. It will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income.
- It is your responsibility as the taxpayers to declare all cryptocurrency-related taxable income.
- Declare it in the tax year in which you receive it.
- Failure to declare could result in unexpected extra costs.
Taxpayers who are doubtful about specific transactions involving cryptocurrencies can seek guidance from SARS or a regulated and trusted financial advisor.
Make sure you go through channels such as Binding Private Rulings (depending on the nature of the transaction).
Increased attention and speculation regarding the future of cryptocurrencies has motivated SARS to provide direction. To show how cryptocurrencies should be treated for tax purposes. However, there is an existing tax framework that can guide SARS and affected taxpayers on the tax implications of cryptocurrencies.
Cryptocurrency is an internet-based digital currency that exists almost completely in the virtual realm. A growing number of supporters use this as an alternative private money. It can pay for goods and services much like normal currencies.
The word “currency” does not have a definition in the South African Income Tax Act (the Act). South Africans do not use or accept cryptocurrencies widely as a way of payment or exchange. It is not legal tender and CAN NOT attract VAT. As such, SARS do not regard cryptocurrencies as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, they view cryptocurrencies as assets of an intangible nature. As a result, we have tax implications in regards to cryptocurrencies.
Tax implications in regards to cryptocurrencies in South Africa
Even though cryptocurrencies is not money, we can still value it, in terms of FIAT money. This is what we expect in the definition of “gross income” in the Act.
If you are following normal income tax rules. When you receive or accumulate income from cryptocurrency transactions, SARS will calculate tax liability on revenue account under “gross income”.
Alternatively, such gains may be capital in nature. This is spelt out in the Eighth Schedule to the Act for taxation under the CGT paradigm.
To determine if an accrual or receipt is revenue or capital in nature, one has to test it under existing law (of which there is no shortage)
Taxpayers can claim expenses combined with cryptocurrency accruals or receipts. The prerequisite is that this expenditure must be in the production of the taxpayer’s income and for purposes of trade.
If it falls within the CGT paradigm, you can also make base cost adjustments.
Gains or losses in relation to cryptocurrencies
We generally categorise gains or losses with reference to three types of scenarios. Each of which can possibly give rise to distinct tax consequences:
- Cryptocurrency can be gained through so-called “mining”. Mining is the verification of transactions in a computer-generated public ledger. ASIC computers achieve this through by solving complex computer algorithms. The “miner” receives compensation in the form of ownership of new coins. which are now part of the network ledger. This gives rise to an immediate accrual or receipt on successful mining of the cryptocurrency. This means that the newly earned cryptocurrency is “trading stock” until you sell or exchange it for cash. This can later be realized through either a normal cash transaction (as described in (2) or a barter transaction as described in (3) below.
- Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges. This is originally markets for cryptocurrencies, or through private transactions.
- You can exchange cryptocurrencies for goods and services. We refer to this type of transaction as a barter transaction. Therefore the normal barter transaction rules apply.
SARS still has yet to make clear the value-added tax (VAT) status of bitcoin.
“VAT treatment of cryptocurrencies is under review according to the anual budget statement 2018. Pending policy clarity in this regard, SARS will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies,” SARS said.
In conclusion, role players believe a starting point, in terms of this debate in South Africa, has been reached. In principle, we have some degree of the regulatory framework in place. However, the practicality is that many role-players are confused as to how this will actually work. Firstly, is value in monetary terms really so easy to establish? Finally, another issue would be the exchange of cryptocurrency pairs … how will valuation work? Especially when it comes to utility coins. Intended for a function such as rewards or incentives of a non-monetary nature?
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