By Robert Gad, Megan McCormack and Jo-Paula Roman

In an opinion of the European Central Bank, the Banking Authority defined virtual currency (cryptocurrency) as ‘a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically’ (https://eur-europa.eu, accessed 11-7-2018).

With cryptocurrencies such as Bitcoin becoming increasingly popular and accessible, it is becoming ever more important that South Africans carefully consider the tax and exchange control uncertainties that accompany the incorporation of these relatively new systems into their day-to-day transactions, businesses and/or their investment portfolios. Summarised below are some of the developing commentaries issued by, inter alia, the South African Reserve Bank (SARB) and the South African Revenue Service (Sars) regarding the tax and exchange control consequences arising from transactions involving cryptocurrencies, such as Bitcoin.

Exchange control

On 3 December 2014, the SARB issued a Position Paper on Virtual Currencies (the Position Paper) indicating at p 2 that a cryptocurrency such as Bitcoin ‘is a digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account and/or a store of value, but does not have legal tender status’ (our italics). (www.resbank.co.za, accessed 20-7-2018). It is, therefore, not of itself, subject to regulation by the SARB. South Africans nevertheless remain subject to South Africa’s exchange control regulations in general and should take care that they do not unwittingly contravene any of these regulations in their dealings with cryptocurrencies, particularly since cryptocurrencies can so easily be transferred internationally without any involvement from South African banks or other authorised dealers.

In August 2017, the SARB established a Fintech Unit and has indicated that it intends to release a new position paper on the evolving uses of private cryptocurrencies (the New Position Paper).  It is not yet clear how the New Position Paper will interact with the Position Paper and it remains to be seen how the SARB’s approach to cryptocurrencies develops over time.

Tax

In its 2018 budget review, released on 21 February, the National Treasury confirmed the widely held view that South Africa’s tax laws are already broad enough to address transactions involving cryptocurrencies. Sars, thereafter, on 6 April, released a media statement ‘Sars’ stance on the tax treatment of cryptocurrencies’ (the media statement) (www.sars.gov.za, accessed 11-7-2018), as well as a frequently asked questions page, in which it expands on its views regarding cryptocurrencies. The media statement advises that Sars does not regard cryptocurrencies as ‘currency’ for purposes of South African income tax legislation but rather as an ‘amount’ and/or ‘asset’, to be dealt with under the ordinary principles of South African tax legislation.

Although Sars does go on to provide some guidance on its views regarding the treatment of cryptocurrencies  – which are mined, invested in or exchanged for goods or services – the circumstances of the specific taxpayer in question would be of great importance in determining, inter alia, the capital or revenue nature of trades involving cryptocurrencies and, therefore, whether gains from such trade would be subject to income tax or capital gains tax (and, conversely, whether losses will be deductible for income tax purposes or realised as a capital loss).

This analysis will remain relevant should the Taxation Laws Amendment Bill of 2018 (the Bill), released for public comment on 16 July, be promulgated in its present form, in which it is proposed that ‘any cryptocurrency’ be included in the definition of ‘financial instrument’ contained in s 1 and that cryptocurrency losses be ring-fenced under s 20A, of the Income Tax Act 58 of 1962.

Unless the Bill is promulgated in its current form, it is also arguable that any supply of Bitcoin in exchange for value in the form of goods or services or currency, is potentially vatable as the supply of a service. This is on the basis that the value added tax (VAT) consequences of a particular trade would depend, inter alia, on whether the trade is considered the supply of a ‘good’ or ‘service’, as defined in s 1 of the Value-Added Tax Act 89 of 1991 (the VAT Act). The rights to performance are personal rights against another person, rather than rights in a thing (which are real rights). Personal rights are incorporeal by their nature, and are classed as movable property.

Personal rights are transferred by cession rather than by traditio (as in the case of tangible, corporeal movable assets) since, by their very nature, they are incapable of physical delivery. The transfer of personal rights cannot be the supply of ‘goods’ as defined in the VAT Act, because those personal rights are not ‘goods’, being incorporeal by nature, they are neither corporeal movable things, nor fixed property, nor a real right in a corporeal thing or fixed property, nor electricity. In our view, it is therefore likely, that cryptocurrency such as Bitcoin constitutes an incorporeal right, the sale of which should constitute the supply of a ‘service’ for purposes of the VAT Act.

Sars have, however, indicated in the media statement that, pending a policy review as regards the VAT implications of transactions involving cryptocurrencies (including Bitcoin), it will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies. Since the legal status of the media statement, as well as the media statement’s impact on existing VAT vendors, is unclear, the proposed inclusion of ‘the issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency’ in the list of activities deemed to be financial services, contained in s 2 of the VAT Act, may well resolve one of the main concerns about cryptocurrency trades. In addition, the proposed inclusion may have an impact on VAT input claims and the VAT apportionment formula applied by vendors, should they enter into any transaction/s involving cryptocurrency.

Conclusion

Given the uncertainty and potentially significant tax and exchange control implications that may still arise in the context of trading in and using cryptocurrencies, such as Bitcoin, despite the commentaries and proposed legislative amendments already released by the SARB and National Treasury, it is very important for any party to a transaction that involves cryptocurrency to obtain advice on their specific circumstances prior to implementation. In addition, it is important for readers and their advisers to make use of any opportunities provided by regulators, such as the SARB and Sars to make recommendations with regard to the most appropriate regulatory framework and bespoke rules for transactions involving such cryptocurrencies going forward, for example by submitting comments on the relevant proposals contained in the Bill (due by close of business 16 August).

With this in mind, the 2018 Tax Indaba will include a session regarding the manner in which cryptocurrencies, specifically Bitcoin, will be taxed going forward.

Robert Gad BA LLB LLM PG Dip (tax) (UCT) is an attorney, Megan McCormack LLB (Stell) LLM (UCT) is an attorney and Jo-Paula Roman LLB (Stell) is a candidate attorney at ENS in Cape Town.

This article was first published in De Rebus in 2018 (Aug) DR 46.