Declare all crypto-currency-related income, says SARS

Taxpayers are entitled to claim expenses associated with crypto-currency accruals, says SARS.

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The South African Revenue Service (SARS) says it will continue to apply normal income tax rules to crypto-currencies.

In a statement issued on Friday, the revenue service said it will expect affected taxpayers to declare crypto-currency gains or losses as part of their taxable income.

"The onus is on taxpayers to declare all crypto-currency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties," the taxman says.

Crypto-currencies are gaining massive traction in SA and globally, as Bitcoin's value 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.

Although crypto-currencies like Bitcoin are not legal tender in SA, the South African Reserve Bank (SARB) recently established a financial technology programme looking to strategically assess the emergence of new technologies like crypto-currencies.

SARB says this will address regulatory issues such as clearing and settlement risks, exchange control impacts, monetary policy and financial stability, and other matters such as cyber security considerations.

In its statement, SARS says taxpayers who are uncertain about specific transactions involving crypto-currencies may seek guidance from SARS through channels such as Binding Private Rulings, depending on the nature of the transaction.

It notes that increased attentiveness and speculation regarding the future of crypto-currencies has prompted calls for SARS to provide direction as to how crypto-currencies should be treated for tax purposes.

According to the revenue service, crypto-currency (typified by Bitcoin) is an Internet-based digital currency that exists almost wholly in the virtual realm. It notes that a growing number of proponents support its use as an alternative currency that can pay for goods and services much like conventional currencies.

In SA, the word 'currency' is not defined in the Income Tax Act. Crypto-currencies are neither official South African tender nor widely used and accepted in SA as a medium of payment or exchange.

"As such, crypto-currencies are not regarded by SARS as a currency for income tax purposes or Capital Gains Tax. Instead, crypto-currencies are regarded by SARS as assets of an intangible nature," it explains.

"While not constituting cash, crypto-currencies can be valued to ascertain an amount received or accrued as envisaged in the definition of 'gross income' in the Income Tax Act. Following normal income tax rules, income received or accrued from crypto-currency transactions can be taxed on revenue account under gross income."

Alternatively, SARS says, such gains may be regarded as capital in nature, as spelt out in the Eighth Schedule to the Act for taxation under the CGT paradigm. Determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence, of which there is no shortage, it adds.

Taxpayers are also entitled to claim expenses associated with crypto-currency accruals or receipts, provided such expenditure is incurred in the production of the taxpayer's income and for purposes of trade.

SARS points out that the 2018 annual budget review indicates the value-added tax (VAT) treatment of crypto-currencies will be reviewed. Pending policy clarity in this regard, SARS will not require VAT registration as a vendor for purposes of the supply of crypto-currencies.

It explains that gains or losses in relation to crypto-currencies can broadly be categorised with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences.

First, it says, a crypto-currency can be acquired through so-called "mining". Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. By verifying these transactions, the "miner" is rewarded with ownership of new coins which become part of the networked ledger.

SARS notes this gives rise to an immediate accrual or receipt on successful mining of the crypto-currency. This means until the newly acquired crypto-currency is sold or exchanged for cash, it is held as trading stock which can subsequently be realised through a normal cash transaction.

Secondly, investors can exchange local currency for a crypto-currency (or vice versa) by using crypto-currency exchanges, which are essentially markets for crypto-currencies, or through private transactions.

Lastly, it points out that goods or services can be exchanged for crypto-currencies. This transaction is regarded as a barter transaction. Therefore, the normal barter transaction rules apply.

Law firm Allen & Overy says without tighter regulations, it will be difficult for the taxman to hold individuals to account for their taxes.

It says SARS will need to rely on the individual to accurately and honestly identify the tax consequences in their annual tax returns.

It points out that SARS should amend the definition of the term "asset" in the Income Tax Act to explicitly include virtual currencies.

"As Bitcoin is not yet widely accepted as a medium of exchange, it seems unlikely to be classified as currency. It would be prudent to follow international practice on this matter and classify Bitcoin as an asset, such that taxpayers will be taxed using the existing tax legislation."