With the increased interest in cryptocurrency trading in South Africa and globally, National Treasury has been considering the provisions of South Africa tax laws in relation to their application to cryptocurrency trading. The view of government is that cryptocurrencies pose great risk to the income tax system due to its volatility and uncertainty and further that the supply of cryptocurrencies could cause administrative difficulties to our system.
Then Minister of Finance Malusi Gigaba in his budget speech to Parliament on 21 February 2017, indicated that the value added tax (VAT) and income tax legislation would be amended with a view of providing clarity on the tax treatment of cryptocurrencies in South Africa.
Following these announcements, the South African Revenue Service (SARS) issued a media release on 6 April 2018, wherein it provides its stance on the income tax and capital gains tax treatment of cryptocurrencies in South Africa.
In summary, the following position has been taken by SARS in respect of the taxation of cryptocurrencies:
- cryptocurrencies are not regarded as currency for purposes of income tax or capital gains tax, but instead are regarded as intangible assets which can be valued to ascertain an amount received or accrued for purposes of income tax or capital gains tax;
- taxpayers can claim a deduction of expenditure incurred in respect of the costs incurred in acquiring cryptocurrencies, where the expenditure was incurred in the production of income and for purposes of a taxpayer’s trade;
- alternatively, if the cryptocurrency is held as a capital asset (not as trading stock) the cost of acquisition can be included in the base cost of such cryptocurrency for purposes of calculating the capital gain made on its disposal.
Accordingly, taxpayers entering into transactions which involve cryptocurrency exchanges should obtain legal advice regarding the tax implications of their transactions, in order to ensure that no interest or penalties are incurred for failure to correctly account for tax on such transactions. SARS has indicated that it will apply the general principles of South African tax law to taxable amounts accrued or received by a taxpayer from cryptocurrency transactions, in particular the onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued.
From a VAT perspective, there have been no changes proposed by SARS or National Treasury regarding the value-added tax consequences of cryptocurrency trading and SARS currently does not require taxpayers to register for VAT for purposes of the supply of cryptocurrencies.