The draft proposals of the Taxation Laws Amendment Bill (TLAB) are that the supply of crypto-currencies be treated as "financial services" for purposes of the Value-added Tax (VAT) Act.
The implication of this is that no VAT will be levied on the issue, acquisition, collection, buying, selling or transfer of ownership of any crypto-currency.
So says Natalie Napier, partner at law firm Hogan Lovells, who points out that the proposal means the consumer will not have to be concerned about charging or collecting any VAT when undertaking any transaction in respect of any crypto-currency.
The crypto-currency market is thriving in SA, with more and more players joining the fray.
Treasury recently passed the 2018 Draft Taxation Laws Amendment Bill and 2018 Draft Tax Administration Laws Amendment Bill for public comment. The comments are due by no later than 16 August.
"Once comments are received, there may be hearings relating to the comments which can potentially result in amendments to the draft legislation which is then published," says Napier.
"The draft legislation and any amendments, if applicable, will only be enacted into law at a later date," she adds.
Gerhard Badenhorst, director at law firm Cliffe Dekker Hofmeyr, concurs that if the proposal by National Treasury to treat the activities involving crypto-currencies to be financial services is accepted, then these activities will be exempt from VAT in terms of the provisions of s12(a) of the VAT Act.
"If the crypto-currency transactions are exempt from VAT, then no VAT will of course be payable on the sale or supply of crypto-currencies," says Badenhorst.
"The supplier of the crypto-currency will then also not be entitled to register for VAT purposes even if the trading income therefrom exceeds the R1 million VAT registration threshold, and no VAT may be deducted in respect of expenses incurred in relation to such activities. The exemption also has further implications which require consideration."
He explains that if a person uses a crypto-currency as mechanism to pay for goods or services, then the payment itself will not have any VAT consequences.
"A VAT-registered person may, however, deduct the VAT charged by the supplier of the goods or services if the goods or services are acquired for the purpose of making taxable supplies.
Where a supplier of goods or services accepts crypto-currency as payment for a supply of goods or services, the supplier must convert the value thereof into South African rand and must issue a tax invoice in rand to the recipient."
Extreme volatility
Law firm Norton Rose Fulbright explains that in the South African budget review of 21 February, it was noted that due to the extreme volatility of crypto-currencies, as well as the uncertainty in respect of their sustainability, crypto-currencies were said to pose risks to the South African income tax system in addition to administrative difficulties from a VAT perspective.
For these reasons, a proposal was made in the budget review that income tax and VAT legislation be amended, it notes.
Following the budget review and growing uncertainties regarding the taxation of crypto-currencies, on 6 April, SARS announced that crypto-currency transactions are subject to the general principles of South African tax law, resulting in the effect that any revenue received, gains made or losses incurred in the hands of an individual in respect of crypto-currency transactions, may be regarded as revenue in nature and included in the taxpayer's income.
This will be subject to tax a maximum rate of 45%, alternatively as capital in nature and subject to Capital Gains Tax (CGT) in which case the gain will be taxed at a maximum rate of 18%, the tax team at Norton Rose Fulbright says.
It adds that of significance is the proposal of TLAB to include the "acquisition or disposal of any crypto-currency" as a specified trade (also referred to in the guide issued by SARS as a "suspect trade"), and thus limiting the use of any assessed loss which may arise in respect of that trade.
"Simply put, if a natural person incurs a loss from trading in crypto-currencies, the person cannot use the loss to reduce the tax which, for example, the person pays on their salaries. If the person does make a loss trading in crypto-currencies in a tax year, such loss may be carried forward and may be deducted from any gains made from trading in crypto-currencies in that year."
According to Norton Rose Fulbright, the provisions contained in Section 20A are referred to by SARS as an "anti-avoidance measure in terms of which the expenditure incurred in conducting a trade is limited to the income from that specific trade".
"Any excess loss is then carried forward and is set off against any income derived from that trade in a subsequent year of assessment, provided that the taxpayer is a natural person and the sum of taxable income is subject to the maximum marginal rate of tax.
"Should the proposed amendment come into effect, natural persons who are trading in crypto-currencies which have resulted in assessed losses, will face the aforementioned ring-fencing restrictions should they wish to utilise an assessed loss derived from the trading of crypto-currencies as a set off against non-crypto-currency trading income," the law firm says.
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