23 Jul 2018

Cryptocurrencies and SARS

Practice Area(s): Corporate & Commercial | Tax |

Increased interest regarding cryptocurrencies has prompted calls for SARS to provide direction as to the tax treatment of cryptocurrencies. SARS have expressed, however, that there is an existing tax framework that can guide SARS and affected taxpayers on the tax implications of cryptocurrencies, making a separate Interpretation Note unnecessary for now.

What must first be noted, although trite, is that the term cryptocurrency is somewhat of a misnomer due to the fact that it is not a currency but rather an incorporeal asset.

The second point to note is the method of acquisition. The method of acquisition, and the purpose for its possession and ultimate disposal are important indicators that are considered when determining the nature of the asset. If revenue in nature, such as trading stock, then any gains will be included in one’s gross income. On the other hand, if capital in nature, then any capital gain arising from such asset’s disposal may be included in one’s taxable income at the prescribed inclusion rate (ie; so-called “capital gains tax”).

On this point, SARS’ notice provides the following:

“Gains or losses in relation to cryptocurrencies can broadly be categorised with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences:

  1. A cryptocurrency can be acquired through so called “mining”.  The “miner” is rewarded with cryptocurrency. This gives rise to an 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 or a barter transaction.
  2. 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.
  3. Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply.”

It is somewhat concerning that SARS have stated that cryptocurrency acquired through mining is held as trading stock. This suggests that SARS is of the view that all cryptocurrency received from mining constitutes income, regardless of whether this is done on one’s home computer that is mainly used for personal purposes such as gaming or research.

Another noteworthy point to make is the fact that there is at least one other method that one can acquire cryptocurrency, and which SARS have not even mentioned (let alone provided clarity on the taxation thereof). Some cryptocurrency developers focus on creating a use for their cryptocurrency, and one way this is being done is by creating platforms that exclusively require a particular cryptocurrency to be used in order to access the platform. There are cryptocurrencies such as Viuly that are trying to enter this space by competing against online streaming platforms like YouTube, and these cryptocurrency video platforms are trying to encroach on YouTube’s market capital by undercutting YouTube. To elaborate, YouTube gets paid by advertisers. YouTube then give their content-providers a portion of this advertising revenue, which is rumoured to be around 50%. Cryptocurrencies like Viuly, which are to be used on the Viuly video-streaming platform, pay both the content-providers and the viewers in cryptocurrency. 65% goes to the creator and the viewer receives 25%.

When applying the ordinary rules of taxation, a reasonable conclusion may be that the receipt of cryptocurrency by the viewer may be capital in nature (due to the taxpayer in all likelihood not having a profit-making scheme or intention when acquiring the cryptocurrency). In such instance, this would mean that a tax liability may only arise upon the disposal of that cryptocurrency. The burden of proving that the amount was capital in nature, however, lies with the taxpayer.

The SARS publication makes it clear that the existing tax framework is to be applied to receipts of cryptocurrencies. Taxpayers should therefore be aware that they may be required to account for their cryptocurrency receipts in their annual returns.