The volatility of crypto-currencies, together with the frequency of the taxpayer's crypto-currency transactions, will complicate the tax implications on virtual currencies.
So say legal experts dealing with crypto-currencies after the South African Revenue Service (SARS) earlier this month said it expects taxpayers to declare crypto-currency gains or losses as part of their taxable income.
SARS announced on 6 April that crypto-currencies will be taxed using the existing tax framework. Crypto-currency will be treated as an intangible asset and the nature (capital versus revenue) of crypto-currency transactions will be determined on a case-by-case basis.
Crypto-currencies are gaining massive traction in SA and globally. For example, the value of Bitcoin, the most prominent crypto-currency, surged dramatically over the past couple of years. Although Bitcoin has been highly volatile, it rose 10-fold in 2017 alone and has averaged annualised gains of over 400% since July 2010.
Bitcoin traded in the range of $500 to $1 000 between 2013 to the beginning of 2017. Last year was considered the best year for Bitcoin after its price jumped from the $1 000 level at the beginning of the year to its all-time high of $20 000 by the end of the year.
However, 2018 started with bad news, bans and crackdowns on the crypto market, leading the bears to collapse the total crypto-currency market capitalisation by 70% in the first three months of the year.
At the time of publishing, Bitcoin was trading at $8 173.88 (R97 000).
Earnings records
Pranith Mehta, associate at law firm Allen & Overy, comments that the volatility of crypto-currencies in itself does not affect the simplicity in which a taxpayer would ordinarily record their earnings.
However, he notes the volatility of crypto-currency together with the frequency of the taxpayer's crypto-currency transactions, especially in the case of crypto-currency traders, may affect the ease of recording their earnings.
"Therefore, a taxpayer with a high frequency of crypto-currency transactions may struggle to keep an accurate record of any gains or earnings made through a single transaction," says Mehta.
He adds that the fact that crypto-currency is so volatile also makes it difficult to accurately record the rand value of the crypto-currency at the time of the transaction.
According to Mehta, when a taxpayer records income earned in foreign currency in their income tax return, in terms of section 25D of the Income Tax Act, 1962, the taxpayer will convert the foreign currency income to rand at either the spot rate at the date of receipt or at the average exchange rate for the relevant year of assessment.
He explains that SARS publishes the average exchange rate for each year on its Web site. "This makes it easier for the taxpayer to accurately record the income earned. The exchange rate for crypto-currencies, however, is not legislated for in the Income Tax Act and makes it difficult to accurately record the rand value income earned by the taxpayer from crypto-currency transactions."
Kerri Crawford and Belinda Sussman from law firm Norton Rose Fulbright say SARS is of the view that the existing tax framework can be applied to crypto-currencies, and the onus to declare all crypto-currency-related taxable income rests with the taxpayer. Ultimately, successful tax collection depends on truthful declarations made by the taxpayers, they note.
"Systems have been implemented to monitor taxpayers' declarations where possible. For example, employers are required to declare their employees' remuneration details to SARS, and banks are required to declare specific information pertaining to their clients to SARS."
However, they say information in the crypto-currency environment is not so easily obtained.
Regarding the volatility of crypto-currencies, Crawford and Sussman point out that taxpayers are required to declare their earnings in rands.
They explain that the point of exchange (the point at which a taxpayer bought crypto-currencies using fiat currency and then later received fiat currency in exchange for crypto-currency) is, therefore, relevant.
"Taxpayers will need to keep records of these transactions, and the value of them in fiat currency, in order to make accurate declarations for tax purposes. The fact that crypto-currencies are volatile is irrelevant, as the gain or loss is determined at the time of exchange to fiat currency.
New frameworks
Mehta says the Australian, American, British and Canadian tax authorities are among the front runners in establishing a tax framework around crypto-currencies.
"However, given that the taxation and regulation of crypto-currencies are a relatively new concept, it is too soon to say with certainty whether it has been successful," says Mehta.
Crawford and Sussman point to Brazil, Canada, Singapore, Japan and Australia as jurisdictions that have made statements similar to that of SARS regarding the tax treatment of crypto-currencies.
Japan and Australia have introduced legislation regulating crypto-currency exchanges and requiring them to be registered. South Korea requires that users who want to make crypto-currency transactions must have a bank account in their real name at the same bank as the crypto-currency exchange, which will link the accounts, they point out.
However, they say most of the measures implemented are still relatively new and little information is available on whether they have been successful.
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