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    Home » Doelie Lessing » Why Sars might be wrong on crypto money

    Why Sars might be wrong on crypto money

    By Doelie Lessing19 April 2018
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    Cryptocurrencies, and the substantial gains that are associated with investments in them, caught the attention and interest of the world — not least of all, the taxman. Where money abounds, tax is normally to be collected.

    The South African Revenue Service (Sars) recently issued a statement explaining its views on the tax treatment of cryptocurrencies. In summary, Sars said cryptocurrencies are not to be treated as currency for tax purposes, and that the normal tax principles should apply as if they are intangible assets.

    The reasons provided by Sars are that cryptocurrencies are not official South African tender and are also not widely used and accepted as a medium of payment or exchange.

    The Sars view, and more specifically the basis for its view, as to why cryptocurrencies are not tantamount to currency appears unscientific and potentially wrong

    If Sars is suggesting that the two reasons afforded for not treating cryptocurrencies as currency are the criteria to determine whether something qualifies as “currency” for tax purposes, no currency other than the rand will qualify as currency. Take, for instance, the US dollar: it is not official South African tender and is also not widely used and accepted in South Africa as a medium of payment or exchange. Does that make it something other than currency? Surely not.

    The Sars view, and more specifically the basis for its view, as to why cryptocurrencies are not tantamount to currency appears unscientific and potentially wrong.

    Currency is not an asset for capital gains tax purposes and, as such, not susceptible to capital gains tax upon disposal. Consequently, if cryptocurrency is currency, any capital gains upon disposal will escape the capital gains tax net. In contrast, intangible assets are, in principle, subject to CGT (or income tax).

    Special tax rules apply to foreign currency gains and losses on “exchange items”. Generally speaking, these gains are taxed or losses are deductible, on an annual basis (even if they are unrealised), except in the hands of non-trading trusts and natural persons. A unit of (foreign) currency is an “exchange item” and thus, potentially, subject to these rules. If, however, cryptocurrencies are not currency, these rules will not apply.

    Normal tax rules

    Sars said normal tax rules apply to categorise cryptocurrencies as trading stock or capital assets.

    Given the Sars preference to classify cryptocurrencies as intangible assets, and thus similar to shares in a company, a plethora of tax legislation may ensue to solve disputes about whether a cryptocurrency investment was held on capital or revenue account.

    The abundance of tax litigation on the topic of the capital or revenue nature of shares was one of the reasons for introducing safe-haven rules in terms of which profits and gains resulting from a disposal of shares are generally classified as capital if the shares were held for three years or longer.

    The author, Doelie Lessing, says existing tax framework may need to incorporate cryptocurrencies in a more specific manner in order to avoid confusion and potential unfairness

    Cryptocurrency investments generally do not produce returns. In that respect, they are different to equity investments which normally produce (or at least hold the promise of) dividend income. In many of the tax cases relating to the capital or revenue classification of proceeds on disposal of shares, the taxpayer argued that the shares were held on capital account on the basis that they formed the capital structure which produced income in the form of dividends (based on the tree and fruit scenario). A taxpayer who invested in cryptocurrency may, as a result of the absence of returns, find it hard to demonstrate that cryptocurrency was held as part of its capital structure.

    Having said that, there are numerous other criteria to take into account when determining the capital or revenue nature of an asset. The mere absence of returns should not be conclusive.

    The crypto phenomenon’s tentacles reach into many aspects of settled commercial and legal practice. Tax is no exception. Although Sars is correct that cryptocurrencies do not require a separate tax regime, the existing tax framework may need to incorporate cryptocurrencies in a more specific manner in order to avoid confusion and potential unfairness.

    • Doelie Lessing is tax director at Werksmans Attorneys


    Bitcoin Doelie Lessing Sars top Werksmans Attorneys
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