Cryptocurrency taxation

How is cryptocurrency taxed in South Africa and elsewhere?

Do you own cryptocurrency? Do you know what your tax liability is? The unprecedented growth in the use of cryptocurrency around the globe has led many economists, policymakers and private investors to wonder about the cryptocurrency taxation implications and regulation. Crypto exists outside of the conventional banking system and does not reside in any single jurisdiction. But income is income, however it is earned and whatever currency it is earned in. If you own a property overseas and earn a rental income in euros, you are not exempt from being taxed on the income. There are laws that determine where and how that income should be taxed.

Like any other economic activity, cryptocurrency trading should be subject to some form of tax regulation. When it comes to the legal framework for cryptocurrency, including its day-to-day regulation and taxation implications, a massive contrast exists between developing and developed countries. Policymakers in developed countries such as Canada, Germany and the United Kingdom are continually seeking ways to understand the nature and extent of cryptocurrency use. These nations have been working to develop a regulatory structure that expressly addresses the concerns surrounding virtual currencies. In less-developed countries, such as South Africa, this process has been slow and little progress has been made. The latest development in South Africa has been the recognition of these intangible assets as “financial products” by the South African Reserve Bank.  

What steps have other countries taken to legitimise cryptocurrency and ensure fair cryptocurrency taxation?

Canada

In November 2013 the Canadian Revenue Agency (CRA) proposed two principles for cryptocurrency taxation, specifically referencing Bitcoin: 

1. Bitcoin is taxed in the context of “barter” (buy and sell) transactions 
2. Bitcoin is taxed as a securities transaction. If the transaction relates to an income-generating endeavour, the proceeds are governed by the Canadian Income Tax Act 

Another interesting aspect considered by the CRA and Canadian legislators is the taxation of Bitcoin mining. Any party who engages in the mining of Bitcoin (whether issuing Bitcoin or transacting within the blockchain) holds some form of intangible “inventory”. Arguably, this can be seen as a form of capital or inventory which will require a valuation at the end of each tax year. The CRA has set out methods for valuing this type of inventory – a feat the South African Revenue Service has so far not tackled. 

Germany 

In Germany, the two most important pieces of legislation relating to cryptocurrency are the Valued Added Tax Act and the Income Tax Act. If cryptocurrency is used as “private” money in exchange for goods or services, VAT will apply to the amount of cryptocurrency the consumer pays. Given the rapid fluctuations in the value of cryptocurrency, German policymakers have decreed that VAT applies to these transactions at the moment the consumer pays and receives the goods or services and not when the business receives the cryptocurrency. This position differs from the use of cryptocurrency as a commodity. In that case VAT is based on the value of the obtained consideration. These income tax principles mirror South African income tax laws.

South Africa

While cryptocurrencies are not classed as currency under South African law, they are still regarded as assets/trading stock for taxation purposes. It is a common misconception that only capital gains tax applies to cryptocurrencies in South Africa. The current regulatory framework also allows for income tax rules to apply. Taxpayers are required to declare gains or losses of their crypto assets as part of their taxable income at the end of each financial year. Depending on the circumstances of each case, either capitals gains tax or normal income tax will apply. 

In June 2021 the Intergovernmental Fintech Working Group (IFWC) released a position paper to provide specific recommendations for the development of a regulatory framework for crypto assets. SARS is only one of many role players in South Africa, and the South African Reserve Bank is taking the lead in the formulation of this structure. Until it has been established, tested and approved, the full extent of the tax implications in South Africa cannot be fully determined.

For more information

Do you want to know more about cryptocurrency? SD Law is a firm of experienced attorneys based in Cape Town, with offices in Johannesburg and Durban. If you want more information about this new world, call Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za.

Further reading:

• Cryptocurrency theft
• What is cryptocurrency?
• Cryptocurrency – the wild west or a carefully regulated environment?
• Cryptocurrency – myths and misconceptions

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