Perhaps the greatest disruptor in the investment field, cryptocurrencies have attracted significant interest from both small private investors and from governments. But, because of their nature, it’s been difficult for the authorities in countries across the globe to regulate them - and that includes how to treat them from a tax perspective. Among the difficulties are the fact that they are not bound by specific country borders and that they don’t “fit neatly into established asset categories”, according to Investopedia.
Like many regulators worldwide, the South African Revenue Services (SARS) has sought to clarify the tax treatment of cryptos in a recently published web page entitled “Crypto Assets & Tax”. This provides guidance to taxpayers on the taxation of crypto assets.
SARS regards a crypto asset as a digital representation of value which is transferred and stored electronically for the purpose of payment, investment, and other forms of utility. Legally, it is an intangible asset.
According to SARS, cryptocurrencies are excluded from the definition of currency, as they are neither official South African tender nor widely used and accepted as a medium of payment in the country.
As regards the taxation of these investments, section 1 of the Income Tax Act of 1962 defines “gross income” as the total amount, in cash or otherwise, received or accrued, excluding receipts or accruals of a capital nature. The term “cash or otherwise” broadens the concept largely to include any receipt which has an ascertainable value. This principle has been part of our common law for a long time.
Profits received on cryptos are thus now clearly taxable. But what becomes important for the South African taxpayer is whether crypto assets should be classified as capital or as revenue in nature. Since revenue profit is taxed at higher rates than capital gains, the issue is of significance.
Whether the crypto assets are of a revenue or capital nature will depend on the facts of each case. The normal tests will apply. For example, where cryptos are received as payment for goods and services, they will form part of the taxpayer’s gross income. Similarly, cryptos will be regarded as income where they are paid to employees as salary and are therefore subject to employees’ tax.
There is an argument that cryptos are always of a revenue nature based on a long line of (somewhat contradictory) case law dealing with the taxation of Krugerrands. This is relevant as gains on Krugerrands and cryptos are only realised when the asset is sold which is strongly suggestive of a revenue asset.
According to SARS, however, existing income tax principles must be relied upon to determine whether cryptos are of a revenue or capital nature. These include: the intention of the taxpayer, the frequency of transactions or trades, the period for which the cryptos were held, and the taxpayer’s occupation or trade. There is thus an acceptance by SARS that they could potentially be seen as capital assets.
SARS will trace crypto transactions through third-party service providers who submit financial data to SARS. This ups the stakes from a compliance perspective to ensure that there are no omissions on one’s tax returns.
Taxpayers must declare all crypto-related taxable income in the tax year in which it is received or accrued. The authorities will also look at whether the investments were made in compliance with exchange control. This all opens up new requirements for South African taxpayers, who will have to become more familiar with the requirements of the authorities.