South Africa has no specific laws or regulations that deal with the use of cryptocurrencies like bitcoin. It follows that, to date, there aren’t any court rulings or directives that focus on the tax treatment of bitcoin-related transactions. However, the South African Revenue Service (Sars) has voiced plans to release guidance on what the tax implications may be of trading in bitcoin and is expected to advise on whether it should be considered as an asset, a currency or a barter transaction.
People can buy bitcoin in three ways. Firstly, individuals can convert local currency to bitcoin using marketplaces, or bitcoin exchanges. An example of a bitcoin is exchange is Luno, founded in 2013. Secondly, people can exchange goods or services to acquire bitcoin. Thirdly, bitcoin can be acquired through “mining”. Bitcoin mining is achieved by successfully verifying transactions in the public ledger. This verification is achieved by the miner through the solving of complex algorithms. The miner verifies a bitcoin transaction and simultaneously releases new coins into the network. The miner is then rewarded with a specific amount of bitcoin for solving these algorithms to verify transactions.
Once bitcoin is acquired, it may be used mainly for three purposes. Firstly, it can be held purely as an investment. Secondly, it may be exchanged for goods and services using online commerce websites and payment platforms. There are more and more vendors that accept and treat bitcoin as a currency. Lastly, bitcoin can be traded using an online exchange.
In predicting how Sars will tax bitcoin transfers, one should consider the international practice as a starting point.
The Internal Revenue Service (IRS), the American tax authority, 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 currency, such as bitcoin, is treated as property — thus existing tax principles will apply to virtual currency transactions.
The IRS treats any disposal of property as a capital gain or a capital loss. Therefore, if a taxpayer holds virtual currency as a capital asset, then that taxpayer may realise a capital gain or loss on the sale or exchange of that virtual currency. American tax reporting requirements will apply to bitcoin transactions as are applicable to any other transaction involving property.
It is important to note that the IRS requires a taxpayer who “mines” bitcoin to include the fair market value of the bitcoin as gross income in their taxable income.
The Australian Taxation Office (ATO) considers bitcoin transactions as being akin to barter transactions and is of the view that bitcoin is neither money nor a foreign currency. Further, the supply of bitcoin is not a financial supply for the purposes of goods and services tax (GST). The ATO, however, considers bitcoin as an asset for capital gains tax purposes.
A taxpayer who predominantly uses bitcoin for the purchase goods or services for personal use may disregard any capital gain or loss from the disposal of the bitcoin if the cost of the bitcoin is A$10 000 or less. Doing business with bitcoin, however, is treated differently by the ATO. If a business receives bitcoin for goods or services, it must record the value in Australian dollars as ordinary income. The value in Australian dollars will be the fair-market value which can be obtained from a reputable bitcoin exchange at the time of receipt.
The Canadian Revenue Agency (CRA) provides that where digital currency is used to pay for goods or services, the rules for barter transactions apply. A barter transaction occurs when any two persons agree to exchange goods or services and carry out that exchange without using legal currency. Therefore, when a taxpayer receives bitcoin as payment, the revenue earned will be deemed to be what the taxpayer would have ordinarily charged for the good or the service, and ordinary income tax principles will 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 bitcoin will depend on whether the transaction is deemed to be capital or income. If bitcoin is acquired for investment purposes, disposal will result in a capital gains tax liability. Conversely, if the intention of the bitcoin holder is to realise a profit, then the disposal of the bitcoin will result in an income tax liability.
South African industries were initially slow to react to the use of Bitcoin. However, this is changing rapidly. One example is Takealot.com, which now accepts bitcoin as a method of payment. In addition, in September 2017, South Africa’s second largest supermarket chain Pick n Pay piloted a project at a store in Cape Town where Bitcoin was accepted as a method of payment. South Africa currently has two bitcoin exchange platforms, namely Luno and Icecube. These platforms accept bank deposits in exchange for bitcoins which, thereafter, may be used to trade or purchase goods and services from vendors who accept the cryptocurrency as a method of payment.
The Davis Tax Committee, established by the minister of finance in 2013, was tasked with assessing South Africa’s tax policy framework in supporting inclusive growth, employment, development and fiscal sustainability. The report that the committee compiled stated that the use of virtual currencies was not widespread in South Africa. However, it said legislators need to consider the potential impact of such currencies on tax compliance and to monitor international developments in order to determine a suitable approach for South Africa.
Currency or asset
The Income Tax Act of 1962 does not define the word “currency”. However, the definition of “local currency” under section 24I(1) includes “currency of the republic”. Therefore, Bitcoin cannot be deemed “local currency”. The definition of “foreign currency” is defined in section 24I(1) as “any currency which is not local currency”. Bitcoin could, therefore, possibly 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. Conversely, any loss must be deducted from his taxable income. This inclusion in or deduction from a taxpayer’s income is in lieu of any inclusion or deduction ordinarily allowed in terms of the act.
In short, section 24I taxes as income all profits and losses, whether realised or unrealised and whether of a capital or revenue nature, relating to any foreign exchange transactions entered into by a taxpayer. The marginal tax rate on taxable income for the 2017 tax year of assessment is calculated in terms of a sliding scale, with the highest rate for an individual of 41%, 28% for a company and 41% for a trust.
In terms of the Eighth Schedule to the 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 taxation purposes, specifically excludes currency.
Bitcoin can be considered as a commodity that one trades, such as gold or silver, in the hope that its value will rise and yield a profit. Due to 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.
The taxpayer will be deemed to have held the bitcoin as a capital asset if the intention of the taxpayer in acquiring, storing, disposing or exchanging it was a capital intention and remained as such throughout the period that the bitcoin was held, and there was no profit-making scheme present and no factors indicating a scheme of profit-making were present. In this case, the taxpayer will include in his taxable income any capital gain calculated under the Eighth Schedule to the Act. The effective capital gains tax rates for the 2017 tax year of assessment for individuals is 16.4%, for companies 22.4% and for trusts 32.8%.
If the intention of the taxpayer is to obtain bitcoin for the purpose of profit-making, then it will be considered to be “trading stock” and of a revenue nature — in which case, the taxpayer will include such receipt in his taxable income.
For a transaction to attract VAT in terms of the Value Added Tax Act of 1991, there should be a supply of goods or services by a vendor in the course of furtherance of an enterprise, on the importation of any goods in the republic, on supply of any imported service.
The VAT Act requires any person to register as a vendor for VAT purposes in South Africa if the person carries on an “enterprise” in South Africa, and the total value of taxable supplies made by that person exceeds or is likely to exceed the registration threshold of R1m for a 12-month period.
The supply of goods and services are generally subject to VAT at the standard rate, unless such supply is specifically zero-rated or exempt in terms of the VAT Act. Standard-rated supplies are subject to VAT at the prescribed rate of 14%.
Therefore, where a taxpayer involved in the mining and distribution of the newly mined bitcoin (supply), and the supply exceeds R1 million, that taxpayer is obliged to register as a VAT vendor as that supply will be subject to VAT in terms of section 7 of the VAT Act.
“Financial services”, as defined in section 2 of the VAT Act, are exempted from VAT. In terms of section 2(1)(a), the “exchange of currency” is considered to be a financial service. Therefore, if Sars considers bitcoin to be foreign currency, transactions involving the exchange of bitcoin will be exempted from VAT.
Section 11 and 12 of the VAT Act deal with supplies which are zero-rated and exempted supplies respectively. It is highly unlikely that bitcoin will be considered a zero-rated supply in terms of section 11 of the VAT Act, or be considered as an exempted supply in terms of section 12 of the act.
Bitcoin, and the taxation thereof, is not currently regulated by specific tax legislation in South Africa. The issue is that, without tighter regulations, it will be difficult for Sars to hold individuals to account for their taxes and will need to rely on the individual to accurately and honestly identify the tax consequences in their annual tax returns.
Sars should amend the definition of the term “asset” in the act to explicitly 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.
While bitcoin trading may still go unregulated, it provides South African taxpayers certainty in its tax treatment and should have a positive effect on the taxpayers reporting in their annual tax returns.
- Pranith Mehta is tax associate in Johannesburg at Allen & Overy, an international legal practice with 44 offices worldwide