Why tax cryptocurrency in South Africa
We will tax cryptocurrency in South Africa. The SARS stance on the tax treatment of cryptocurrencies is that it will continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income.
Cryptocurrencies are not legal tender in South Africa. This is because they are not widely in use across South Africa as a way to pay or exchange value. SARS do not see Cryptocurrencies as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, SARS see Cryptocurrencies as “assets of an intangible nature.”
Whilst not constituting cash, cryptocurrencies can be valued to ascertain an amount received or accrued as seen in the definition of “gross income” in the Act. Following normal income tax rules, income received or accrued from cryptocurrency transactions are taxable on revenue account under “gross income”.
Alternatively, one can view the capital in nature, as indicated in the Eighth Schedule to the Act for taxation under the CGT example.
Gains from cryptocurrency-related investments and holding may be “capital in nature” in certain scenarios. While taxpayers may claim expenses and deductions from cryptocurrency accruals or receipts, SARS expect taxpayers to declare cryptocurrency gains or losses as part of their taxable income.
The onus is on taxpayers to declare all cryptocurrency-related taxable income in the applicable tax year. Interest and penalties will apply to individuals to who fail to do so – SARS
SARS has stated that if taxpayers are uncertain about specific transactions involving cryptocurrencies, they may seek guidance from SARS through channels such as Binding Private Rulings (depending on the nature of the transaction).
Gains & Losses
SARS broadly categorise gains or losses in relation to cryptocurrencies with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences:
(i) You can obtain cryptocurrency through so called “mining”. Mining happens through the verification of transactions in a computer-generated public ledger by “miners”. They achieve this through the solving of complex computer algorithms. By verifying these transactions the “miner” will receive ownership of new coins which become part of the networked ledger.
This gives rise to an immediate accrual or receipt on successful mining of the cryptocurrency. This means that until the newly acquired cryptocurrency is sold or exchanged for cash, it is held as trading stock which can subsequently be realized through either a normal cash transaction (as described in (ii) or a barter transaction as described in (iii) below.
(ii) Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, which are essentially markets for cryptocurrencies, or through private transactions.
(iii) Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply.
Transactions or speculation in cryptocurrency is subject to the general principles of South African tax law and taxed accordingly.
SARS Tax Cryptocurrency Frequently Asked Questions:
- Is an individual who “mines” cryptocurrency as a trade or business subject to tax on the income derived from those activities?
Such income is subject to normal tax. The person may be liable to register as a provisional taxpayer if the total taxable income he or she receives exceeds the tax threshold
- Should a taxpayer who receives cryptocurrency as payment for goods or services include, in computing gross income, the fair market value of the cryptocurrency?
Yes, such income is also subject to normal tax.
- If an independent contractor receives cryptocurrency for performing services, does this constitute self-employment income?
Such income is subject to normal tax. The person may be liable to register as a provisional taxpayer if the total taxable income received exceeds the tax threshold. SARS allow deductions if it complies with the general income tax principles. Especially relevant is whether the expenditure is for the production of income or for trade purposes.
- Does cryptocurrency paid by an employer, as remuneration for services, constitute wages for employment tax purposes?
Such income is considered to be remuneration for tax purposes and is subject to normal tax.
Questions we have:
- What would be considered as acceptable proof of purchase and sale price?
Conventional receipts and /or invoices will suffice.
- Can the purchase price be either the price on the date of purchase or as with shares the average of the year?
Determine the purchase price on of the earlier date of receipt and accrual. SARS do not regard Cryptocurrency as a share and therefore SARS does not treat it as the average for the year.
- Can you claim expenses you incur while trading cryptocurrency such as Bitcoin?
Expenses incurred on trading crypto currencies like Bitcoin are deductible on condition they meet all the requirements of the Income Tax Act.
- Cryptocurrencies such as Bitcoin is not a currency, nor an asset. How is it taxable?
We share your view that Bitcoin is not a currency for the purposes of South African income tax. SARS regard cryptocurrency as either an asset or a trading stock for income tax purposes.
- How do you declare cryptocurrencies such as Bitcoin trading on my Provisional Tax return (IRP6)?
The income or market value thereof forms part of total taxable income derived by the taxpayer. This is in respect of the year of assessment for which the provisional tax is payable.
- How and where on the ITR12 form do I declare my cryptocurrency income?
Depending on the facts and circumstances of your case, capital gains tax or normal tax may apply. Furthermore the taxpayer must declare such taxable income in the source code or tax return container field of the ITR12.
Further reading: SARS Press Release
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