Please note that the information below is an opinion and cannot be used to rely on as formal tax advice. In order to obtain formal tax advice regarding your tax situation, please contact us directly for a consultation.
For the lazy reader I start with a summary:
- It is my opinion that Bitcoin will be classified as an asset for tax purposes in the current ambit of the income tax act.
- It is my opinion that the gains made on the sale of Bitcoin will be taxed as trading income (except in the unlikely case where it was held as a long term investment where it will be taxed as capital gains).
- See the example at the end of the article.
The view of SARS
SARS has not given their interpretation for the specific tax treatment of cryptocurrency yet. There is a common misconception that this means that no tax has to be paid on cryptocurrency gains. This is not the case, as the income tax act does make provision for gains on cryptocurrency albeit not directly. According to an article published by IOL, in Personal Finance, SARS has made their current position clear “Transactions or speculation in Bitcoin is subject to the general principles of South African tax law and taxed accordingly” (https://www.iol.co.za/personal-finance/youre-liable-for-tax-on-bitcoin-gains-11508366).
For the rest of this article I will refer to Bitcoin as an example, since this is a well known cryptocurrency. Where I use the term Bitcoin I also refer to other forms of cryptocurrency unless explicitly indicated otherwise.
UPDATE 30 June 2018:
SARS has since given their official view:
SARS’s Stance on the Tax Treatment of Cryptocurrencies
PRETORIA, 06 April 2018 – The South African Revenue Service (SARS) will continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income.
The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties.
Taxpayers who are uncertain about specific transactions involving cryptocurrencies may seek guidance from SARS through channels such as Binding Private Rulings (depending on the nature of the transaction).
Increased attentiveness and speculation regarding the future of cryptocurrencies has prompted calls for SARS to provide direction as to how cryptocurrencies should be treated for tax purposes. However, as indicated in this media statement, there is an existing tax framework that can guide SARS and affected taxpayers on the tax implications of cryptocurrencies, making a separate Interpretation Note unnecessary for now.
Cryptocurrency (typified by Bitcoin) is an internet-based digital currency that exists almost wholly in the virtual realm. A growing number of proponents support its use as an alternative currency that can pay for goods and services much like conventional currencies.
In South Africa, the word “currency” is not defined in the Income Tax Act (the Act). Cryptocurrencies are neither official South African tender nor widely used and accepted in South Africa as a medium of payment or exchange. As such, cryptocurrencies are not regarded by SARS as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, cryptocurrencies are regarded by SARS as assets of an intangible nature.
Whilst not constituting cash, cryptocurrencies can be valued to ascertain an amount received or accrued as envisaged in the definition of “gross income” in the Act.
Following normal income tax rules, income received or accrued from cryptocurrency transactions can be taxed on revenue account under “gross income”.
Alternatively such gains may be regarded as capital in nature, as spelt out in the Eighth Schedule to the Act for taxation under the CGT paradigm.
Determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence (of which there is no shortage).
Taxpayers are also entitled to claim expenses associated with cryptocurrency accruals or receipts, provided such expenditure is incurred in the production of the taxpayer’s income and for purposes of trade.
Base cost adjustments can also be made if falling within the CGT paradigm.
Gains or losses in relation to cryptocurrencies can broadly be categorised with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences:
(i) A cryptocurrency can be acquired through so called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. By verifying these transactions the “miner” is rewarded with ownership of new coins which become part of the networked ledger.
This gives rise to an immediate accrual or receipt on successful mining of the cryptocurrency. This means that until the newly acquired cryptocurrency is sold or exchanged for cash, it is held as trading stock which can subsequently be realized through either a normal cash transaction (as described in (ii) or a barter transaction as described in (iii) below.
(ii) Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, which are essentially markets for cryptocurrencies, or through private transactions.
(iii) Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply.
Value-Added Tax (VAT)
The 2018 annual budget review indicates that the VAT treatment of cryptocurrencies will be reviewed. Pending policy clarity in this regard, SARS will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies.
The nature of Bitcoin – Currency vs Asset
In order to assess how Bitcoin fits into the South African Income tax act a first consideration should be to assess the nature of Bitcoin.
Bitcoin cannot be classified as a currency since it is not related to a specific country. Section 24I of the income tax act defines local currency as “currency of the Republic” and foreign currency as: “any currency which is not local currency”. It is thus clear that Bitcoin is not local or foreign currency and therefore not currency.
The next logical consideration would be to assess Bitcoin as an asset (similar to for example shares).
Paragraph one of the the eight schedule of the income tax act defines an asset as:
“property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum and a right or interest of whatever nature to or in such property”
Section 1 of the income tax act defines trading stock as:
“anything produced, manufactured, constructed, assembled, purchased or in any other manner acquired by a taxpayer for the purposes of manufacture, sale or exchange by the taxpayer or on behalf of the taxpayer “
Trading stock is also classified as an asset.
It is therefore in my opinion clear that Bitcoin will be classified as an asset for tax purposes in the current ambit of the income tax act and in the majority of the cases as trading stock when it is traded in a speculative manner.
Capital gain vs trading income
The next question that arises is whether the Bitcoin (asset) will be taxed as a capital gain or as normal trading income when you sell the Bitcoin.
The income tax act is clear on this area as it is well established.
If an asset is held as a long term investment it will be taxed as a capital gain and if the asset is for short term trading (speculative) purposes it will be regarded as trading income.
It can be complex exercise to determine the intention of a taxpayer as to whether the asset was purchased as a long term investment or for trading purposes. This article will not focus on the complexities of determining the long term or trading nature of the asset. In the current Bitcoin environment I am of the opinion that most of the parties buying and selling Bitcoin is doing this for trading purposes. As soon as you buy low and sell high or even only sell high you are providing an indication that you do not have a set investment period.
Conclusion
It is therefore in my opinion clear that the gains made on the sale of Bitcoin will be taxed as trading income (except in the unlikely case where it was held as a long term investment where it will be taxed as capital gains).
In simple terms, the amount you sell the Bitcoin for, less the amount you paid for the Bitcoin will be added to your normal taxable income.
Example
An illustration by example:
Example:
Mr Nakamoto works as an plumber and earns R500 000 salary per year. In addition to this Mr Nakamoto buy and sell Bitcoin.
In the relevant year Mr Nakamoto did the following Bitcoin trades:
- Bought Bitcoin for R100 000 and sold this in the same year for R150 000
- Bought Bitcoin for R60 000 and sold this in the same year for R170 000
Thus the total gain Mr Nakamoto made is R50 000 (R150 000 – R100 000) + R110 000 (R170 000 – R60 000) = R160 000.
The R160 000 should be added to his salary of R500 000. Thus his taxable income will be R660 000 (R500 000 + R160 000).
Please note that exchange gains can also play a role, but will not be discussed in this article.
Author: Chris Herbst, CH Consulting
If you buy in USD and sell in ZAR via the use of different platforms, can this be subject to import tax? Or is it still based as income tax?
Hi Juls,
In my opinion it will not be subject to import tax, only to income tax.
We will need to wait and see whether any specific regulation is released in this regard in the future.
Where can I find a tax practitioner that can assist me with declaring profits from my Cryptocurrencies?
Hi Jeff,
We can assist you with declaring your cryptocurrency gains.
You are welcome to email me directly at chris@chconsulting.co.za then we can take it from there.
Just wondering. If i just exchange btc to zar on luno for example and send them to my bank account.Then at the end of the year i declare all and pay my income tax based on the current tax table will that be ok?
Hi Claudio,
Your understanding is correct, aside from the following:
since you are trading with bitcoin you will need to declare your gains and pay the tax as a provisional taxpayer. I.e. at the end of August and end of February of each year you will file a provisional tax return and pay the required taxes on that.
Should you want to read more about provisional tax, see our blog entry here:
https://www.chconsulting.co.za/blog/item/who-should-register-for-provisional-tax
Does this solve your query?
Thanks Chris for getting back to me.
I am not really a trader, what i do is buy alternative coins and hold them long term, then when im happy with my gain i sell them and convert that to btc and send to my bank account, i really dont wanna get into provisional tax. I can hold coins for years before i sell them.
And not always its a gain, sometimes it results in loss
Pleasure. Trading gain / loss vs capital gain / loss depends on among other factors intention when buying and intention when selling. This needs to be investigated on a per case basis.
If indeed your gains / losses are of capital nature you can declare this annually in your income tax return. As mentioned if trading income you will be a provisional tax payer.
Hi, what is the tax implication if you are simply trading between bitcoin and the other crypto currencies on an exchange and not converting them to ZAR? Does each of these trades need to be individually considered for their gains and losses and taxes paid accordingly, or only when the gains are converted to ZAR? Thanks
Hi Crypto,
The gain / loss for tax purposes is triggered when you realise the gain / loss. I.e when you convert the relevant cryptocurrency to ZAR (or another currency) OR when you move from lets say Bitcoin to Ethereum.
You will be liable for provisional tax on these trades and therefore you will pay tax on your aggregate gains every six months. You can view our provisional tax blog if you would like to learn more about provisional tax https://www.chconsulting.co.za/blog/item/who-should-register-for-provisional-tax.
Hi Chris , I have been mining cryptocurrency for over a year (Ethereum). All of my Ether i have attained has been through mining and not purchased. How would it work if i were to withdraw this into Rands? Add it to my income tax? Thanks
Hi James,
In my opinion the cryptocurrency you receive when you mine will be handled as remuneration.
I.e. when you receive the cryptocurrency for your mining you will calculate the value in terms of your tax reporting currency and that will be the trading income / remuneration earned for your mining. This trading income will be added to your taxable income.
Since you do not actually convert the cryptocurrency, the currency can off course grow / decrease in value, which has another tax implication. In the case where you do not speculate with the said cryptocurrency it will be taxed as a capital gain / loss. The base cost for the capital gain will be the value you “converted” it to on the day you received it as trading income / remuneration. This capital gain / loss will be added to your taxable income.
Same logic as above will follow if you speculate with the said cryptocurrency except it will be taxed as trading income / loss and not a capital gain. This trading income / loss will be added to your taxable income.
Let me know if this is not clear, then I will post an example with values.
Thanks so much for the response Chris. Very interesting! If you could post some figures that would be great. 🙂 Thanks
Pleasure.
Okay, here is an example with values.
Let’s say on 31 Jan 2018 you received 10 cryptocurrency units of value R100 each (the value on 31 Jan 2018 – although you are not converting to ZAR).
Thus your remuneration is 10 x R100 = R1 000.
You will add this R1 000 to your other taxable income as remuneration / trading income and declare this in the provisional tax return due 28 Feb 2018.
Since you kept the cryptocurrency it can now increase or decrease in value. Let’s say it increased in value and is worth R200 per unit on 31 May 2018.
You are of decide to now convert it to ZAR. Thus you receive 10 x R200 = R2 000 for your 10 units of cryptocurrency.
The question now is whether this is trading income or capital income. This is where intention plays a role – i.e. whether your intention on acquisition (when you were awarded these units) was to hold it long term or to sell when the value is high enough.
If capital of nature:
The base cost would be the 10 x R100 = R1 000 you received on 31 Jan 2018. The selling amount would be the value on date of disposal, that is on 31 May 2018, 10 x R200 = R2 000.
Thus your gain is R2 000 – R1 000 = R1 000.
You will include 40% (2018 inclusion rate) of the capital gain to your taxable income (ignoring annual exclusion). Thus 40% * R1 000 = R400
If trading income (not capital of nature):
The full R1 000 gain will be included in your taxable income.
You will declare this taxable income in your 31 August 2018 provisional tax return.
Please note that this is a simplified example and other factors may play a role.
Hope this helps.
Hi,
What is you bought 1 btc last year for 40,000 and then at a later stage cashed out the 40,000 back to your bank account.
So basically your ZAR profit is zero, buy you have a amount of btc left which you intend to store for a long term?
Hi Pieter,
If you bought 1 bitcoin for 40 000 and cashed out 40 000 and there was an increase in the bitcoin value, you actually cashed out a fraction of that 1 bitcoin.
Let’s say the bitcoin value increased to 80 000 per bitcoin. If you cashed out 40 000 you cashed out 0.5 bitcoin.
To calculate the tax:
If trading income:
The value of the 0.5 bitcoin when you bought it was 0.5 x 40 000 = 20 000, you sold it for 40 000, thus your gain is 40 000 – 20 000 = 20 000. Thus 20 000 will be included in your taxable income.
If capital of nature:
The value of the 0.5 bitcoin when you bought it was 0.5 x 40 000 = 20 000, you sold it for 40 000, thus your capital gain is 40 000 – 20 000 = 20 000. Thus 20 000 x 40% (2018 inclusion rate) = 8 000 will be included in your taxable income (ignoring annual exclusion).
Thank you makes sense.
So if you pay up all the taxes for all your trades and stop doing it all together, I assume you will only be liable for more taxes when the day comes that you sell the 0.5btc?
Pleasure. That is correct.
If you are showing too much gains, just purchase Golem or DistricOX and your gains will slowly start going away hence relieving you of your tax implications…
There are plenty of gambling sites for cryptocurrencies what if you win your cryptocurrency and convert to ZAR is that taxable
Hi Peter,
In most cases money won from gambling is not taxable. In my opinion it would be the same for winning cryptocurrency when gambling. However, please note that if the gambling becomes a business activity itself then the proceeds will be taxable. You can see an explanation here: https://citizen.co.za/uncategorized/375292/tax-and-your-winnings/
Hi Peter,
I currently live and work in Japan and have been trading cryptocurrencies this last year and made a large amount of money.
As a non-permanent resident of Japan I am tax exempt from capital gains as long as I do not cash out in yen. (bitcoin profits are considered capital gains here)
Would I be able to cash out my crypto gains in Rands and declare the money tax free as a I am not a South African resident and pay income tax in Japan, before I send it back to Japan and rebuy my holdings?
Hi Vivek,
For your situation the double tax agreement between SA and Japan as well as other specific details of your situation should be considered.
In order to assess your situation we will need comprehensive details. My best guess would be that if you have spend more than 183 days with a consecutive 60 day period in Japan in the last calendar year, it is likely that you would be considered a resident of Japan for tax purposes.
Which means no matter where you realise the cryptocurrency to a currency you will be liable for tax in Japan.
See double tax agreement between South Africa and Japan here: https://www.jetro.go.jp/ext_images/jfile/country/za/invest_04/pdfs/jpn-sa-convention.pdf
For a comprehensive assessment of your situation you can contact us at info@chconsulting.co.za
Hi Pieter,
When you earn cryptocurrency through staking/holding of the cryptocurrency, what kind of tax is then applicable? For example,your initial cryptocurrency that you bought you keep and by keeping it you earn staking rewards or ‘dividends’ on it. Is this not considered as dividend tax?
To me it seems similar to when you hold a share in this case a coin and earn a monthly or yearly dividend on it depending on the company rule.You get rewarded buy holding onto the cryptocurrency.Your rewards is based on the proffits that the cryptocurrency generate from its core business.
Further more share dividends normally get paid in Fiat currency.
Whereas when staking/holding Cryptocurrency X you get rewarded in a different cruptocurrency , Cryptocurrency Z.
My guess would be you pay only dividend tax on the cryptocurrencies you earn from staking/holding.
As soon as you keep the cryptocurrencies Z you earned from staking /holding and you do not immediately sell and convert it to fiat currency, the rewarded cryptocurrency will then also grow in value.When this happens capital gains tax might now also be applicable to the gains on cryptocurrency Z ?
In the last scenario you pay dividend tax and later again capital gains tax?
I would appreciate your input.
Thanks
Hi Jean,
In my opinion your assessment of the situation is correct.
When you earn the ‘dividend’ in cryptocurrency you will be liable for foreign dividend / interest income. The value that you will use is the ZAR value of the relevant cryptocurrency on the day you earned the foreign dividend / interest. This value is then the base cost for your capital gain that could arise in the future when you realise the relevant cryptocurrency.
Let me know if this makes sense or if you would like an example with value?
Hi Chris,
Thank you for your feedback.
Do you also consider rewards received from staking/holding of the cryptocurrency is taxable as foreign dividends or interest income then?
Will there be a minimum staking/ holding period for it to be considered taxable as a dividend? Why I am asking this is because staking rewards/interest works for any period between 1 day or longer, tailored to the staker’s specific needs.
Is foreign dividend /interest income 20% right? I will appreciate it if you could show me an example with numbers for 100% clarity.
Thanks again.
Hi Jean,
I have read up a bit now on staking. It seems to me like the reward you earn will simply be taxed as trading income and not interest or dividends. Staking reward seems very similar to me as normal mining rewards. Thus you will simply add the value (converted to local currency) when received to your taxable income and this will then be your base for future possible capital gains / losses.
See the example with values I gave to James in an earlier comment above.
Hope this helps.
Hi Chris
If I bought cryptocurrency in Korea while living here and paying tax here (been here longer than 183 days) if I withdraw it here should I declare it on my SA income tax return as income? And if so what proof would I provide for the buy/sell price. If I don’t withdraw it and send it to the luno exchange-would SARS then tax me on the whole amount as they wouldn’t have proof of how much I bought it for etc.
Thanks for such an informative article!
Hi Nic,
It is a pleasure.
It will be best to consult the double tax agreement between SA and Korea for 100% clarity on where that income should be taxed.
Provided that it should be taxed in SA, yes you should declare it on your SA income tax return based on the ZAR value when you realised the gain. It becomes taxable when you realise it (convert from crypto to local currency or to another crypto currency), irrelevant of whether you transfer it to your bank account or an exchange such as Luno.
The onus is on you to provide SARS with the values you bought and sold at, same as with other capital gain transactions. If SARS audit your tax return they can at that point determine the validity of what you declared and as for proof.
Hope this helps you.
Hi Chris
Nice article! Let’s say you are trading, and for 2017-18 tax year you declare a profit and add that to your taxable income. Now in the 2018-19 tax year, you made losses. Do the losses also get added to taxable income, thereby reducing taxable income?
Secondly, if you’ve declared all your trades as income, does this mean you would not need to pay CGT on them?
Thanks!
Hi Ryan,
Thank you.
Yes, if you are trading the gains will increase the relevant years taxable income and losses will decrease the taxable income (even if in different years as per your example).
Correct, if you declare your gains as trading income you will not also pay CGT.
Hope this helps you.
Hi Chris
Thanks for all the useful info, much appreciated.
I’ve made good profits trading crypto during the current tax year that ends end of Feb 2018 – and it seems it would be considered income tax as I never held a single crypto currency for more than 6 months or so.
Question – If I were to buy bitcoin again with proceeds (Rands) made from trading in current tax year, would this be deductible as trading expenses for this tax year as the net income in Rands would be less the amount re-invested?
Thanks
No, this will not be deductible as trading expenses since your re-investment is capital of nature and not an expense. Please note your trading gains will be determined by adding all your realised trades together and deducting the purchase cost of the unit/s that is being realised. A trade is realised when:
(a) Cryptocurrency is converted to a fiat currency, for example Bitcoin to USD
(b) Cryptocurrency is converted to another cryptocurrency, for example Bitcoin to Ethereum.
Hi Chris,
Thanks for this useful article and all your responses.
What would the tax implication be when realising cryptocurrency that was received as a gift?
I know a gift from a non SA Resident in traditional currencies is tax free, but how can one make sure a cryptocurrency gift is not considered by SARS as remuneration instead?
Thanks!
Hi there, I do have a potential question. First things, it is very important to be honest with and in all tax affairs – that include cryptocurrencies – or else it will have a unpleasant effect on the tax payer.
My question is that if the tax payer resigns from the job on the basis of earning income from mining cryptocurrencies, what tax implications would it incur for the resigned tax payer, and if he / she remains “own boss” earning from these cryptocurrencies. In other words, that resigned tax payer wishes not to work from 9 – 5 or 8 – 5.
I would like your feedback in this case, as I’ve seen quite a number of tax payers who are salaried in the normal workforce, quit their full time careers for working from home due to making money from mining cryptocurrencies.
The last thing and first thing is always this: be honest or else cough up tax penalties if it has to relate to earning profits from cryptocurrencies!
Hi Ulf-Dieter,
Your earnings from the cryptocurrency will be trading income and if you trade from home and this is your full time occupation you will be able to deduct certain expenses such as office expenses (provided you meet the requirements), travel expenses, telephone, internet etc against the income you earn.
So I’ve put together an income statement of sorts (bit of a loss really, but whatever) but I’m not sure where to slot the relevant number into the ITR12. Anyone know where it should be included?
Hi Mr G,
You can declare a business trade activity and specify the income and cost / expense. Thus on first page of ITR12 select business activity and then enter 01. The relevant fields will then open on the form.
A quick question.
If my son from the US were to send me cryptocurrency to my cypto wallet and then I converted the crypto to Rand and transferred this amount from my crypto wallet to my South African bank account, would it be considered ‘income’?
Hi Simon,
This depends on the reason your son is giving you cryptocurrency.