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Cryptocurrencies - what about tax?

Cryptocurrencies

Cryptocurrencies have taken the world by storm but many of us have no idea what they are or how exactly they work. To add to this lack of understanding by the general public, our Regulators also seem to be stumped. In the Budget Review 2018 speech, the Finance Minister alluded to the amendment of the relevant Tax Laws to deal with Cryptocurrencies. This has to date not been done.

Given the uncertainty as to the nature of Cryptocurrency, it is important to understand where they fall in terms of current legislation and regulations for tax purposes. Cryptocurrency is defined as a digital currency that uses encryption techniques and a decentralized system to allow for transactions without using middlemen like banks.

In terms of the South African Reserve Bank Act1, the South African Reserve Bank (also known and hereinafter referred to as “SARB”) governs the management of currency and has the sole right to issue coins and notes, which is a legal tender. The SARB has stated that Cryptocurrencies do not have legal-tender status in South Africa.2

Cryptocurrencies or virtual currencies are further not defined as securities in terms of the Financial Markets Act.3 They are therefore not subject to the regulatory standards that apply to the trading of securities.

For a transaction to attract VAT in terms of the Value Added Tax Act No. 89 of 1991(hereinafter the “VAT Act”), there should be a supply of goods or services by a vendor, in the course of furtherance of an enterprise; on the importation of any goods in the republic; and/or on supply of any imported service. In terms of the VAT Act , money is defined as coins issued by the SARB, paper currency that is legal tender in circulation as currency from the Republic. It is important to determine whether Cryptocurrencies would be considered as the supply of money or whether it could be considered to constitute the supply of goods or services that are subject to VAT.

You must then determine whether trading Cryptocurrency can be considered as the supply of goods for VAT purposes. In terms of the VAT Act goods means corporeal movable things, fixed property and any real right in any such thing or fixed property. Given that Cryptocurrencies are incorporeal, they would not constitute goods.2 They can however constitute services and attract VAT, if bought or sold in the carrying on of an enterprise.

In other jurisdictions, such as the United Kingdom, Cryptocurrencies are classified as taxable vouchers and, therefore, VAT would have to be levied on the sale thereof. The Chinese Central Bank, however, has prohibited banks from being involved with Cryptocurrency. Canada has two separate rules and the application thereof depends on whether Cryptocurrency is used to buy goods or services, or whether it is merely bought and sold for speculative purposes, in which case it will be taxed just like any other investment.

National Treasury has not yet revealed which route it will be taking regarding the taxation of Cryptocurrencies in South Africa but SARS is treating Cryptocurrencies under capital gains tax.4 Although there is still a lot of mystery about the future regulation of Cryptocurrencies, it is clear that all asset transactions attract some form of tax. This includes a possible capital gains tax or alternatively, income tax.

For assistance with transactions involving Cryptocurrency, contact a professional at SchoemanLaw Inc. 

Act No. 90 of 1989
2 https://businesstech.co.za/news/banking/234457/how-bitcoin-and-other-digital-currencies-could-be-taxed-in-south-africa/
Act No. 19 of 2012
https://businesstech.co.za/news/finance/218925/sars-to-provide-tax-rules-on-bitcoin-and-other-cryptocurrencies-innext- few-months-report/

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