“Bitcoin, blockchain, mining”.
By now we’re all familiar with cryptocurrency and its related buzzwords. The initial boom in cryptocurrency markets, has resulted in many people becoming cryptocurrency investors, with everyone seeking to capitalise on intangible investment opportunity, or at least, the loss that comes with their investments, in the current bear market.
Coupled with the on-going market fluctuation, there is a lot of uncertainty about the tax implications of cryptocurrency transactions. This is especially important as the South African Revenue Service (“SARS”) look to become tougher when assessing individuals' cryptocurrency trading activities and holdings.
“The only way to overcome this hurdle, if you are a serious investor, is to approach a tax specialist with legal experience, one who understands the technical implications of tax in the crypto space and doesn’t sugar coat the hard facts”. – Thomas Lobban, Head of Crypto Asset Tax
Defining the Intangible
Traditionally defined, cryptocurrency, or “crypto assets”, are a digital currency designed to work as a medium of exchange through a blockchain network that is not reliant on any central regulatory authority, such as a government or bank, to uphold or maintain the pegged value system.
Crypto assets are defined as financial instruments in South Africa, with SARS clarifying that crypto asset profits/gains are subject to the normal rules of income and capital gains taxes. Due to the unreported nature of these financial instruments, the onus falls on the taxpayer to declare proceeds from crypto asset transactions.
The uncertainty arises when determining whether profits accrued from transactions involving these crypto assets, both on platform, and when realised for fiat currency, are capital or revenue in nature.
This distinction is vitally important in determining, and in the instance of taxation, ensuring the correct tax treatment is applied, per transaction.
SARS have preliminarily outlined three scenarios in which crypto assets may attract distinct tax consequences, namely:
1. Exchange of Local Currency For A Crypto Asset
This involves exchanging local currency for a crypto asset (or vice versa) using a cryptocurrency exchange or in a private transaction.
2. Goods Or Services Being Exchanged For Crypto Assets
If the transaction involves the crypto asset serving remuneration for services rendered or as payment of the purchase price for goods sold, this will fall squarely within the realm of income tax.
Mining is essentially the process by which new cryptocurrency is added to the blockchain, with the “miner” receiving ownership of the new coins.
Newly mined crypto assets amount to an accrual or receipt of “trading stock”.
The Currency of Compliance
Due to the intangible and uncertain nature of crypto-asset transactions, there is some disparity in market best practices, especially when considering the recent classification as a “financial instrument” under South African domestic tax laws.
What can be confirmed as the practical best practice, is to ensure pro-active compliance, albeit a difficult task in light of new regulations imposed by SARS. It may aid your cause, to seek the guidance of a professional tax specialist, in not only ascertaining the classification of specific crypto assets and transactions, but also assist you in ensuring your tax submissions to SARS are wholly accurate.
Once your crypto asset taxation classification is confirmed, as either capital gains, or income, there may be available deductions which the cryptocurrency qualifies for, dependant on the requirements to be met.
Written by Jashwin Baijoo, Head of Crypto Asset Compliance at Tax Consulting SA; and Loyiso Bavuma, Tax Attorney at Tax Consulting SA