South Africa – Cryptocurrency – I believe SARS is wrong in part of their analysis

My view – where cryptocurrency is held as a currency to buy goods or services, when its value is released on buying those goods or services as a currency, there should be no tax consequence.  Just like when you hold dollars, that are converted to Rands when you buy goods and services. You are not taxed on the currency fluctuation (except if you are a currency trader, or the goods/services bought form part of a business where exchange rates factor into the COG or COS). When you draw down on your bitcoin to buy “stuff” the same  principles should apply. There has been no Capital Gain or Revenue Gain. Just like drawing down on those Dollars to buy wine, or food – you don’t trigger  a separate currency fluctuation calculation for tax.

Now read the SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... view in light of my basic analysis above. For your views, email me:

Daniel@TaxRiskManagement.com

Introduction

On April 6 2018 the South African Revenue ServiceThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... (SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently...) announced that it:

• will continue to apply normal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... rules to cryptocurrencies (also referred to as ‘virtual currencies’); and
• expects affected taxpayers to declare cryptocurrency gains or losses as part of their taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,....

Was this move expected?

Due to the growing popularity of cryptocurrencies in South Africa and the absence of legislation concerning their taxation and regulation, SARS’s decision to address this issue was widely anticipated.

In December 2017 SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... indicated that it was in discussions with leading global technology companies regarding more efficient methods of tracking cryptocurrency trades. These discussions and SARS’s recent statement suggest that it is scrutinising cryptocurrency taxation and transactions.

SARS’s position compared with that of foreign revenue collection authorities

Based on the taxation of cryptocurrencies in countries such as the United States and India, South Africa appears to tax cryptocurrencies in line with internationals trends.

The US Internal Revenue ServiceTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... (IRS) treats cryptocurrencies as property and applies existing tax principles to cryptocurrency transactions. It follows that should a taxpayer dispose of a cryptocurrency, this will trigger either a capital gain or a capital loss. The same regime is followed in South Africa, whereby any gain or loss derived from a capital asset, such as property held for investment purposes, will be taxed in accordance with the Eighth Schedule to the Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Act (58/1962). However, in the United States, should a taxpayer ‘mine’ a cryptocurrency, such as bitcoin, the IRS requires that the fair market value be included in the taxpayer’s taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,.... This provision is similar to South Africa’s tax system, which requires that an asset held on revenue account be included in that taxpayer’s taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,....

In India, cryptocurrencies are deemed to be capital assets if purchased for investment purposes. Therefore, any gain arising due to the disposal of a cryptocurrency will be taxed in accordance with the provisions dealing with capital gainsCapital gains refer to the profit earned when an asset, such as real estate, stocks, bonds, or even a collectible, is sold or exchanged for a price that exceeds its original purchase cost. These gains are a critical component of personal and corporate finance, as they influence investment strategies and tax obligations. Capital gains are realised when an asset is... – a principle which South Africa also follows and is in accordance with SARS’s recent statement. However, in India, should transacting with cryptocurrencies become frequent, the taxpayer could be held to be trading in cryptocurrencies and the income generated from such trade would need to be included in the taxpayer’s taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,.... Once again, this is in line with the South African tax system.

General remarks

SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... has stated that cryptocurrency transactions are subject to the general principles of South African tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public.... Thus, any revenue received, gains made or losses incurred in respect of cryptocurrency transactions may be regarded as:

• revenue in nature and be included in the taxpayer’s income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable...; or
• as capital in nature and be subject to capital gains taxCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price.... (CGTCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price....) in accordance with the Eighth Schedule to the Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Act.

The test to determine the nature of a cryptocurrency transaction and whether it is of a revenue or capital nature must consider:

• the taxpayer’s intention when acquiring the cryptocurrency; and
• the facts and circumstances of each case.

The South African courts have decided that the primary intention when the asset has been acquired is conclusive in determining whether the asset is held on revenue or capital account, unless other factors exist and show that the asset has been sold in the scheme of profit making. If the taxpayer’s intention was to obtain the cryptocurrency for the specific purpose of profit making:

• the asset will be considered to be trading stock and of a revenue nature; and
• the income derived therefrom will have to be included in the taxpayer’s taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,....

Risks

The following risks are associated with the use of cryptocurrencies:

• SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... does not view cryptocurrencies as a form of legal tender issued by the government in the form of coins or notes. As such, should companies or individuals agree to make use of a form of cryptocurrency in exchange for goods or services and something goes wrong, no legal recourse will be available.
• Security threats exist due to the lack of a central authority should a technical error arise or a transaction involve a deceitful dealer. In addition, hackers are targeting cryptocurrency accounts.
• Consumers and cryptocurrency traders should consider the unpredictability of cryptocurrencies due to:
  • their lack of intrinsic value, which means that they do not sell any products, earn revenue or provide employment;
  • the fact that they generally return no dividends and only a small amount of the currency’s total value is used to develop the cryptocurrency; and
  • the fact that they are difficult to value and decisions made to purchase cryptocurrencies are based on the market sentiment at the time.

Further, there is a lack or regulatory oversight in respect of cryptocurrencies despite government attempts to clamp down on the industry. This lack of regulation allows for market manipulation, which introduces volatility and discourages institutional investors which are unwilling to take the risk of investing in cryptocurrencies without assurance that their investment is protected and secure. Increased investment from institutional investors could soften such market volatility.

How will tax consequences of cryptocurrencies be calculated?

Since cryptocurrency transactions are subject to the general principles of South African tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public... – depending on whether the cryptocurrency is held on revenue or capital account ?– an income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... or CGTCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price.... calculation in respect of cryptocurrency transactions will be the same as for any other revenue or CGTCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price.... calculation.

SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... has indicated that a taxpayer can deduct expenses incurred in respect of cryptocurrencies (eg, bitcoin trading tax), provided that they meet all of the act’s requirements.

Clarity provided by SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently...

SARS’s statement has provided taxpayers with clarity regarding the tax treatment of cryptocurrencies, placing the onus on them to declare income made in accordance with the general principles of South African tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public.... Taxpayers must therefore declare income derived from cryptocurrencies in their income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable...tax returnA Tax Return is a formal statement filed by an individual or entity that details income, expenses, and other pertinent tax information to a tax authority. Its primary purpose is to assess tax liability, determine refunds owed, or highlight outstanding taxes due. Tax returns may include information about earnings, capital gains, allowable deductions, and credits, depending on the tax regulations... in the year in which that income accrued. Failure to do so correctly could result in understatement penaltiesUnderstatement penalties are financial sanctions imposed by revenue authorities when a taxpayer under-declares or underreports their taxable income, leading to a shortfall in taxes owed. These penalties aim to deter tax evasion, encourage accurate reporting, and maintain the integrity of the tax system. Penalties may vary based on the degree of culpability, ranging from negligence to deliberate intent to mislead.... of up to 200{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} and the imposition of interest.

Despite SARS’s clarification regarding the taxation of cryptocurrencies, the novelty thereof guarantees that various uncertainties remain. In this regard, taxpayers may seek guidance from SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... on the taxation of specific cryptocurrency transactions through binding private rulingsA tax ruling is a formal decision provided by a tax authority, clarifying how specific tax laws and regulations apply to an individual taxpayer or a corporate entity in particular circumstances. Often sought before a significant financial transaction or investment, tax rulings offer legal certainty by outlining the tax implications and obligations in advance. Such rulings are pivotal for multinational....