Taxation of cryptocurrencies still unclear
CAPE TOWN - The growing popularity of cryptocurrencies such as Bitcoin seems to have presented the taxman with a challenge, because there are no laws or regulations that deal specifically with cryptocurrencies.
To date, there have been no court rulings or directives that focus on the tax treatment of Bitcoin-related transactions in South Africa.
However, the South African Revenue Service (Sars) has said it will release a guidance note on the tax implications of trading in Bitcoin, and it is expected that this will clarify whether Bitcoin should be regarded as an asset, a currency or a barter transaction.
Christopher Renwick, an attorney at Tax Consulting SA, says although South Africa is usually behind the global curve, the country seems to be keeping pace with the Bitcoin trend. “This is positive, as we are living in an increasingly digital world”, and was it was only a matter of time before currencies became digital.
The big questions are: how will Sars tax cryptocurrencies, and will the South African Reserve Bank regard cryptocurrency transactions as being governed by the exchange control regulations?
The Reserve Bank is of the view that cryptocurrencies do not fall within its regulatory ambit. Its “Position Paper on Virtual Currencies”, which was issued in 2014, maintains that cryptocurrencies are decentralised, convertible virtual currencies, which are not legal tender.
According to international law firm Allen & Overy’s tax associate, Pranith Mehta, the Income Tax Act does not define “currency”. However, the definition of “local currency” under section 24I(1) of the Act includes “currency of the Republic”. Therefore, Bitcoin cannot be deemed “local currency”. The same section defines “foreign currency” as “any currency which is not local currency”, so Bitcoin may be considered to be foreign currency.
“Section 24I(3) requires a taxpayer to include in his taxable income any gain from a foreign exchange differential.”
Mehta says that, in terms of the Eighth Schedule to the Income Tax Act, an “asset” includes “property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made from gold or platinum and a right or interest of whatever nature to or in such property”. Therefore, an asset, for tax purposes, specifically excludes currency.
The law firm also says Bitcoin can be considered as a commodity that is traded in the hope that its value will rise and yield a profit. As a result of this similarity to gold and other comparable commodities, Sars may regard Bitcoin as an asset.
It must then be established whether Bitcoin will be treated as income or revenue.
A taxpayer will be deemed to have held Bitcoin as a capital asset if the taxpayer’s intention in acquiring, storing, disposing or exchanging Bitcoin is a capital intention and remains as such throughout the period that Bitcoin is held, and there is no profit-making scheme present and no factors indicating a scheme of profit-making are present. In which case, the taxpayer will include in his or her taxable income any capital gain calculated under the Eighth Schedule to the Act.
If the intention of the taxpayer is to obtain Bitcoins for the purpose of profit-making, the Bitcoins will be considered “trading stock” and of a revenue nature. In this case, the taxpayer must include such receipts in his or her taxable income.
Renwick says Sars’s only commentary on the issue to date suggests that cryptocurrencies will be taxed in terms of the rules governing capital gains.
He says Sars is considering ways of removing anonymity from Bitcoin to ensure that those who buy it pay their share. “This will potentially be a hurdle for Sars, given that the appeal of Bitcoin is the freedom to trade without necessarily trading your name as well. If we consider Sars’s approach to taxing Bitcoin along the lines of capital gains tax, a red flag masts itself.”
Mehta says that, without tighter regulations, it will be difficult for Sars to hold individuals to account, and it will have to rely on taxpayers accurately and honestly identifying the tax consequences in their annual tax returns.
The firm suggests that Sars amend the definition of “asset” in the Act to include virtual currencies.
“As Bitcoin is not yet widely accepted as a medium of exchange, it seems unlikely to be classified as currency. It would be prudent to follow international practice on this matter and classify Bitcoin as an asset, such that taxpayers will be taxed using the existing tax legislation,” he explains.
Renwick says: “Sars has not yet figured out how to trace Bitcoin transactions, and their position is currently that Bitcoin is subject to capital gains tax, but what happens when they find a way and, in so doing, discover those who trade Bitcoin for profit? With recent cases determining that the retrospective application of tax provisions is not unlawful, consider the implications and the penalties that Sars may impose. The thought is alarming.”
What happens in other countries?
WHEN predicting how the South African Revenue Service may tax Bitcoin transfers, it is useful to consider the practice in other countries.
United States. The Internal Revenue Service (IRS) defines virtual currency as a “digital representation of value that functions as a medium of exchange, a unit of account or a store of value”. For federal tax purposes, virtual currencies such as Bitcoin are treated as property, thus existing tax principles apply to virtual currency transactions. The IRS treats any disposal of property as a capital gain or capital loss.
The IRS requires taxpayers who “mine” Bitcoin to include the fair market value of the Bitcoin as gross income in their taxable income.
Australia. The Australian Taxation Office (ATO) considers Bitcoin transactions as akin to barter transactions and is of the view that Bitcoin is neither money nor foreign currency.
The supply of Bitcoins is not a financial supply for the purposes of goods and services tax.
The ATO, however, considers Bitcoin as an asset for capital gains tax purposes. Doing business with Bitcoin is treated differently by the ATO. If a business receives Bitcoin for goods or services, the business has to record the value in Australian dollars as ordinary income.
Canada. The Canadian Revenue Agency (CRA) provides that where digital currency is used to pay for goods or services, the rules for barter transactions apply. Therefore when a taxpayer receives Bitcoin as payment, the revenue earned is deemed to be what the taxpayer would have ordinarily charged for the good or the service, and ordinary income tax principles apply.
The CRA also provides that digital currency can be traded like a commodity.
The tax consequences of the realisation of gains or losses from trading of Bitcoins will depend on whether the transaction is considered to be of a capital or an income nature.
Source: Allen & Overy