With the introduction of Bitcoin as the first decentralised cryptocurrency back in 2009, digital assets have taken on various forms, from traditional cryptocurrencies to NFT’s and have steadily gained popularity throughout the world.
The ease of accessibility together with the simplicity in which these digital assets can be traded globally, has presented a unique challenge to tax authorities throughout the world regarding recovery of taxes from these transactions.
Section 1 of the Income Tax No.58 of 1962 (“The Tax Act”) includes “any crypto asset” under the definition of a financial instrument. While the term crypto asset is not defined any further, SARS have noted that, “A crypto asset is a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.”
While the Tax Act does not detail any specific tax treatment of crypto asset transactions, SARS has indicated that normal income tax rules will apply to crypto assets and affected taxpayers would need to declare crypto assets gains or losses as part of their taxable income.
Normal income tax rules would imply that income received or accrued from crypto asset transactions would either be regarded as revenue or capital in nature. The normal tests such as frequency of trades and intention of the taxpayer would be applied to determine in which category the transaction would fall.
Depending on whether the transaction is revenue or capital in nature, taxpayers would be allowed a deduction on the expenditure incurred in the production of the income, or similarly, the costs associated with a capital asset would form the base cost of the crypto asset.
The following examples are indicative of taxable events relating to crypto assets:
- Trading cryptocurrencies with or for fiat currency ie. Bitcoin to Dollar
- Trading one type of cryptocurrency for another ie. Ethereum to Bitcoin
- Spending of cryptocurrencies on goods and services
- Earning of cryptocurrency through “mining”
- Earning of cryptocurrency as remuneration for services
South Africa does not regard crypto assets or cryptocurrencies as legal tender and while the crypto asset remains unregulated, the onus is on the taxpayer to declare all taxable transactions. Due to the popularity of crypto assets, it is only a matter of time before better monitoring systems are put in place to identify these taxable events and taxpayers that did not previously declare income or gains from crypto asset transactions may find themselves liable for additional tax, penalties and interest.
Divisional Director: Corporate Tax, Johannesburg