Cryptocurrency: tax treatment and exchange controls in South Africa

The South African Revenue Service (SARS) is of the view that the current tax framework and normal income tax rules are wide enough to apply to cryptocurrencies – see the SARS media release of 6 April 2018.

SARS’S stance on the tax treatment of cryptocurrencies.

SARS has not published an interpretation note on the taxation of cryptocurrencies, stating that existing tax legislation provides sufficient guidance to both SARS and taxpayers.

Income tax: cryptocurrencies are assets, not currency

SARS does not view cryptocurrencies as currency. Rather, they are classified as “assets of an intangible nature” which can be valued.

Received or accrued income from the sale of cryptocurrencies or their appreciation in value is calculated and included in a taxpayer’s gross income.

Expense claims such as exchange fees, losses on sale, and foreign exchange are allowed if the expense relates to the production of income or trade. The Taxation Laws Amendment Bill of 2018 (not yet promulgated) seeks to include cryptocurrencies under the definition of a financial instrument. Losses on the sale of cryptocurrencies are further limited by Section 20A of the Income Tax Act.
Capital gains tax (CGT): different transactions get different tax treatment

Whether CGT applies instead of income tax will depend on whether the gain is included in the CGT definition and Eighth Schedule of the Act. Base cost adjustments are also allowed. For the time being, any gains made from selling cryptocurrencies are likely to be treated as income, not a capital gain.

In determining the nature of the gain for income or capital gains purposes, SARS lists the following three categories of transactions:

  • The mining of bitcoin which gives rise to trading stock, which, on a subsequent sale would give rise to income (as with anything you would buy and sell).
  • Exchanging local currency for cryptos through an investment on an exchange. These are normal purchase and sale transactions.
  • Exchanging cryptocurrency for goods and services. This is treated as a barter.

The category of the transaction and the circumstances of the taxpayer are used as a guide in determine the type of tax applicable. Existing case law would be relied on in this regard.

VAT: cryptocurrency suppliers do not have to register as VAT vendors … yet

SARS has confirmed that suppliers of cryptocurrency do not have to register as VAT vendors at present. In the 2018 budget review, National Treasury stated that a policy review is under way.

However, some are of the opinion that the definition of the supply of goods and services in the Value-Added Tax Act can be applied to cryptocurrency transactions. They argue that the trade of cryptocurrencies in exchange for goods and services could be a transaction where VAT should apply.

Section 2 of the Act may also deem certain activities around cryptocurrency as financial services. Clarity is still needed in this regard.

Exchange control : Cryptocurrency not regulated by Reserve Bank

The South African Reserve Bank (SARB) has defined cryptocurrency as “a digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account and/or a store value but does not have legal tender status”.

SARB does not regulate cryptocurrency transactions currently; however, the SARB Fintech Unit is reviewing the Reserve Bank’s approach and we expect a more comprehensive view on regulation in the near future.

Although cryptocurrency is not regulated by SARB, the annual foreign capital transfer limit still applies to South African residents, which means residents must have tax clearance certificates in order to invest.