The South African Revenue Service (Sars) is in discussions with some of the top technology companies in the world to enable it to track cryptocurrency trades more efficiently.
Interest in cryptocurrencies, like bitcoin, has risen significantly, but since the environment is fairly opaque, regulators around the world are still struggling to formulate a plan to deal with it.
The exponential rise in the price of bitcoin in particular poses a threat to Sars’s revenue collection efforts as it is largely dependent on traders’ own truthful declaration of profits.
Financial institutions like banks are required to supply Sars with information on the investments of their clients for verification purposes, but in a crypto environment where such information is lacking, Sars may have to trust that a taxpayer made honest declarations with regard to crypto gains.
Randall Carolissen, Sars group executive for research, says the tax collection agency is having discussions with its counterparts on how to track cryptocurrency trades.
“As you can imagine, it is very difficult — the blockchain technology. Without revealing too much — we are talking to some of the top technology companies in the world that (are) doing similar work for Canada and the UK and we are hoping to get that technology.”
Sars is also strengthening its relationship with the South African Reserve Bank to look more critically at matching the flow of funds in and out of the country with the actual movement of goods as there is “room to hide things”, he says.
“At the moment, we are treating cryptocurrency in the same way as capital realisation — so in other words, it is like a Krugerrand. If you buy it at a particular point and you then sell it, you will be faced with a capital appreciation and then we will treat it as capital gains tax.”
OECD
Carolissen says Sars is working through the Organisation for Economic Cooperation and Development’s recommendations, which include quite detailed information on how cryptocurrencies should be treated.
He concedes that Sars hasn’t had any major declaration thus far.
“We were part of the OECD working groups and that has certainly been incorporated into our policy environment. So we are on top of it. In fact, South Africa is cited as one of the leading implementers of this cryptocurrency environment.”
Ruaan van Eeden, MD for tax and exchange control at the Geneva Management Group, says the firm is receiving an increasing number of questions about the exchange control and tax treatment of cryptocurrencies.
In a position paper issued by the Sarb in 2014, the bank stressed that it did not oversee, supervise or regulate the virtual currency (VC) landscape, systems or intermediaries for effectiveness, soundness, integrity or robustness.
“Consequently, any and all activities related to the acquisition, trading or use of VCs are performed at the end user’s sole and independent risk and have no recourse to the bank,” it said.
Van Eeden says the question of how crypto profits or gains should be dealt with is a subjective one, dependent on the facts of each particular case. Currently, most taxpayers deem it a normal asset class which is not held for speculative or trading purposes. It follows that any gains would likely be subject to capital gains tax as opposed to income tax. However, this would generally be determined with reference to the intention of the taxpayer on acquisition or disposal of the asset.
Many bitcoin traders have made significant profits. This poses a risk to Sars as there may be uncertainty about the income tax treatment and, potentially, value-added tax. Moreover, taxpayers may not have declared these profits at all, Van Eeden says.
As cryptocurrencies become more sophisticated, one should expect more stringent regulation, he adds.
- This article was originally published on Moneyweb and is used here with permission