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.
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.
An illustration by 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