In the past decade, the use of crypto assets around the world has increased dramatically. However, there are many uncertainties surrounding this fast-evolving field. This article discusses tax consequences arising from the acquisition and disposal of crypto assets.
Despite its more popular name, “cryptocurrency”, crypto assets are not recognised as a form of legal tender in South Africa. This is also the case in many other jurisdictions. In their Position Paper on Crypto Assets published in June 2021, the Intergovernmental Fintech Working Group (IFWG) reiterated that crypto assets are not “money” in the sense of legal tender, although they perform some of the functions of money.
The IFWG identified various risks emanating from the fact that crypto assets and crypto asset service providers are still unregulated in South Africa and recommended that regulation be introduced. The objectives identified by the IFWG in regulating crypto assets include the combatting of tax evasion and of impermissible tax avoidance arrangements.
SARS has long been clear that crypto assets are subject to normal tax rules. In April 2018 SARS’s stance on the tax treatment of crypto assets was published on its website, confirming that the onus is on the taxpayer to declare any crypto-related taxable income, on the earlier of receipt or accrual. In SARS’s view, crypto assets are not regarded as currency for income tax or capital gains tax purposes, but rather as intangible assets. SARS identified three possible scenarios:
- Mining: The “mining” of crypto assets, which is achieved by solving complex computer algorithms.
- Cash exchanges: The exchange of local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges.
- Barter transactions: The use of crypto assets to pay for goods or services.
Crypto assets can be held and disposed of with either a revenue or a capital intent, which will determine whether income tax or capital gains tax applies. The normal rules and jurisprudence for determining whether an asset is held on revenue or capital account apply to crypto assets.
For instance, crypto assets may be acquired and held as long-term investments to realise capital growth. In such a case, upon the disposal of the crypto assets (either in terms of an exchange for cash or in terms of a barter transaction) a capital gain or loss is likely to arise. If a capital gain arises, the gain would be subject to tax at the applicable rate, being an effective rate of 22.4% for companies and a maximum effective rate of 18% for individuals. If a taxpayer acquires and disposes of crypto assets using foreign currency as opposed to Rand, the provisions of the Income Tax Act relating to the acquisition and disposal of assets in foreign currency must be considered. If an individual or a non-trading trust acquires and disposes of crypto assets using the same foreign currency, the capital gain or loss on disposal should be determined in that foreign currency and translated to Rand using the spot rate on disposal or the average exchange rate that applied in the year of disposal. On the other hand, a company or a trading trust that acquires or disposes of crypto assets in the same foreign currency is required to first translate the proceeds and expenditure to Rand separately. For the foreign currency proceeds, the company must use the applicable spot or average exchange rate on the date the foreign currency proceeds were received or accrued. For the foreign currency expenditure, the company must use the applicable spot or average exchange rate on the date on which the expenditure was incurred. After these translations to Rand, the overall capital gain or loss is determined in Rand.
The disposal of crypto assets by a person who frequently trades in crypto assets is likely to give rise to income tax at the applicable rate, being 28% for companies and a maximum marginal rate of 45% for individuals. Taxpayers are also entitled to claim expenses associated with cryptocurrency accruals or receipts that are not capital in nature, provided such expenditure is incurred in the production of the taxpayer’s income and for purposes of trade. In such a case, crypto assets on hand at the end of a year of assessment should be accounted for as “closing stock” for income tax purposes and valued at cost.
SARS appears to view the “mining” of crypto assets as revenue in nature, giving rise to an immediate accrual or receipt on successful mining of the crypto asset, which is then accounted for as “trading stock” by the miner. If such treatment is adopted, it is unclear how the value of “trading stock” is to be determined in accordance with section 22 of the Income Tax Act without giving rise to double taxation in the hands of the miner upon subsequent disposal of the crypto asset. In terms of this treatment, the successful mining of a crypto asset may give rise to income tax at the above rates even before the crypto asset has been exchanged for cash or in terms of a barter transaction.
The Taxation Laws Amendment Act (TLAB) of 2018 amended the definition of a “financial instrument” in the Income Tax Act to include any cryptocurrency (amended by the 2020 TLAB to refer to crypto asset rather than cryptocurrency). Consequently, crypto assets included in closing stock are valued at cost and may not be written down below cost. The 2018 TLAB also added the acquisition or disposal of any cryptocurrency (likewise changed to crypto asset) to the list of suspect trades for purposes of ringfencing assessed losses for individuals.
From a VAT perspective, the 2018 TLAB added the issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency to the definition of exempt “financial services” in the VAT Act. The dealing in crypto assets itself therefore currently does not give rise to VAT. However, services related to such dealings may well give rise to VAT if the VAT registration threshold is met.
The past decade has shown that crypto assets are increasing in importance. Investors should be mindful of the risks associated with dabbling in these yet-to-be-regulated assets and consider the related tax consequences carefully.
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