Cryptocurrencies’ tax scenarios still murky

The South African Revenue Service’s (Sars’) announcement that it considers cryptocurrencies to be intangible assets, and not currencies, has brought an end to widespread speculation about the nature of cryptocurrencies.

Sars confirmed it would apply normal income tax rules to cryptocurrencies and that it expected taxpayers to declare gains and losses as part of their taxable income.

Asheer Jaywant Ram, senior lecturer in the School of Accountancy at the University of the Witwatersrand, says this means transactions involving cryptocurrencies like Bitcoin will be regarded as barter transactions.

In other words, individuals using Bitcoin as a method of payment will need to consider the value of Bitcoin in relation to the value of the goods received to determine income or gains.

Joon Chong, tax partner at Webber Wentzel, says that for individuals who buy and sell cryptocurrencies on an exchange, the announcement means that if they transact as speculators, income received has to be included in their gross income and will be subject to normal tax.

However, where someone holds cryptocurrencies for long-term gains, the sale will be subject to capital gains tax, she adds.

While the tax community welcomed the clarification around arguably the most contentious cryptocurrencies’ issue – its nature for tax purposes – there are still significant areas of uncertainty.

The valuation of cryptocurrencies like Bitcoin remains a point of major concern, Ram says. In a barter transaction, the value of the Bitcoin used to pay for goods and services has to be determined to calculate the income or gain (or loss).

Under normal circumstances, the value of goods received is easily identifiable, but with cryptocurrencies establishing the value will be much harder as it trades on various international exchanges and price levels differ substantially.

“Bitcoin has this high level of volatility in and of itself and across exchanges there is no parity,” Ram says.

For example, Bitcoin was trading at R84 500 around midday on April 9 on the South African exchange Luno, but at R84 000 on Ice3X. It was trading at around R82 130 on Bitfinex in Hong Kong and at R82 194 on the Euro exchange Bitstamp. (The spot rand-dollar and rand-euro exchange rates were used to calculate the rand values).

Ram says it’s uncertain which valuation Sars would find acceptable. Although it has confirmed that cryptocurrencies may give rise to gains, it didn’t clarify how it would value Bitcoin for that purpose.

“Sars would need to clarify what level of valuation or what exchange and market would need to be considered in order to value the Bitcoin in a barter transaction scenario.”

Another area of uncertainty relates to the VAT treatment of cryptocurrency transactions. Sars confirmed that the VAT treatment of cryptocurrencies would be reviewed, and that it will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies in the interim.

This means taxpayers don’t have to register for VAT if their cryptocurrency supplies exceed the compulsory R1 million threshold for the total value of taxable supplies during a 12-month period.

Ram says that since Bitcoin is not considered a currency, there is a possibility it may be regarded as “goods” for VAT purposes.

If this is the case, exchanges supplying Bitcoin may have to levy output tax on it, which will increase the cost of doing business in the Bitcoin ecosystem. Clarification in this regard is quite urgently needed, he adds.

Chong says it is also uncertain how the VAT legislation on cryptocurrencies and the updated definition of electronic services that was published in February will reconcile.

The latter regulations, which defines electronic services quite broadly, seem to include trading of cryptocurrencies by a foreign supplier.

“More clarity is still required in terms of VAT. Where do cryptocurrencies fit in, whether or not trading in cryptocurrencies should be an exempt supply, who is the recipient for supplies to an exchange, and whether cryptocurrencies are ‘services’ in the VAT Act?”