You're liable for tax on Bitcoin gains
Bitcoin is growing in popularity. The fact that leading retailer Pick n Pay gave the cryptocurrency a trial run – a successful one, too – is evidence that it has the potential to be adopted for regular trade.
Bitcoin is just one of many cryptocurrencies that are unregulated. They are decentralised digital currencies that can be bought, sold and traded.
The South African Reserve Bank (Sarb) does not consider cryptocurrencies as legal tender. But how does the South African Revenue Service (Sars) treat cryptocurrencies?
Marcus Botha, the director, corporate tax consulting at public accounting, tax, consulting and business advisory firm BDO, says: “Cryptocurrencies are not subject to the regulations of the Reserve Bank, as the position paper they released on virtual currencies states that the cryptocurrency does not have legal-tender status.
“Until further clarity and formal regulation, Sars will apply general tax principles and tax the income or capital gains that are received or accrued to a taxpayer.”
The taxman agrees. “Transactions or speculation in Bitcoin is subject to the general principles of South African tax law and taxed accordingly,” says Sars.
Botha says that, although Bitcoin is not recognised as a legal tender, owning a cryptocurrency may be regarded as an asset.
“The Bitcoin regarded as an asset and in your possession will have to be valued and included in your tax return at the end of the year of assessment.”
If you use this asset to transact, the transaction may be regarded as a barter transaction or trading stock. In such a case, Botha says VAT on barter transactions should be considered.
He says that, if you hold this asset as an investment, capital gains tax (CGT) may be applicable to the eventual disposal of this asset.
“For both income tax and CGT purposes, the rand value amounts will need to be included in the gross income of the taxpayer. Therefore, exchange differences may have to be considered on conversion of the asset’s value using the relevant exchange rates.”
There are various ways of earning Bitcoins, such as accepting them as a means of payment for completing tasks on websites, interest payments, getting tipped and mining Bitcoins.
Bitcoin mining is the process of adding transaction records to Bitcoin’s public ledger, known as the blockchain. The blockchain serves to confirm transactions to the rest of the network as having taken place.
Botha says that mining Bitcoin is a misleading term.
“Technically, this is not a mining activity, but a service provided through blockchain and earning a fee or commission for that service. The income earned as a fee or commission may be included in gross income and therefore declared.”
According to Sars, such income is subject to normal tax. You may be liable to register as a provisional taxpayer if the total taxable income received exceeds the tax threshold for the year.
Sars says a taxpayer who receives cryptocurrency as payment for services should include, in computing gross income, the fair market value of the cryptocurrency and such income is subject to normal tax.
Sars says that cryptocurrency received by an independent contractor for performing services constitutes self-employment income, and such income is subject to normal tax. You may be liable to register as a provisional taxpayer if the total taxable income received exceeds the tax threshold for the year.
Jonathan Purnell, an associate designate in the tax team at Norton Rose Fulbright South Africa, says in his blog that, when Bitcoin is bought on an exchange, the value of the Bitcoin – the rand price at the time of acquisition – must be recorded.
He says when that Bitcoin is used to purchase goods or sold for rands, tax – at your marginal rate – will be applied to the amount by which the disposal value exceeds the acquisition value. In relation to the purchase of goods, the disposal value would be the market value of the goods acquired.
“If you receive Bitcoin as payment for providing goods or services, the full rand value of that Bitcoin at the time of receipt will be subject to tax at your marginal rate as if you had received an asset in consideration for the goods or services in question.”
However, as the global understanding of cryptocurrencies is constantly developing, technical know-how and experience is needed to navigate this new legal landscape. In this fast-paced environment, the above conclusions may change as the regulators and legislators catch up with this new technology, Purnell says.