Tuesday, September 17, 2019

South African Taxation Agency Introduces Tax Regulations on Cryptocurrency

The taxation regulatory body of the South African government, which is popularly referred to as SARS (The South African Revenue Service), has introduced a set of supervisory rules and guidelines which will be a guide as to how virtual currency tax will be levied in the country. Earlier this year, the agency launched cryptocurrency tax laws requiring citizens to pay income and capital gains taxes.  In April, the financial agency released a report saying that:

“The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties.”

This period witnessed the revenue body saying it would take practical advantage of the existing taxation framework instead of creating a new one to suitably guide the virtual currency taxation Act. Owing to the fact that the Income-tax Act in the country has not clarified what the word “currency” should mean, this usually serves as a void easily exploited by tax evaders in the country.

Sometime in April, the SARS revealed its intention in a statement made in a press conference regarding the new set of cryptocurrency regulations:

“In South Africa, the word ‘currency; is not defined in the Income Tax Act (the Act). Cryptocurrencies are neither official South African tender nor widely used and accepted in South Africa as a medium of payment or exchange. As such, cryptocurrencies are not regarded by SARS as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, cryptocurrencies are regarded by SARS as assets of an intangible nature.”

Though the proposed set of regulations by the agency will still consider virtual currencies as “intangible asset,” this will consequently translate to cryptocurrencies attracting income tax and will impose it on South Africans as a duty to declare both their virtual asset gains and losses whenever declaration of taxable income is being made.

The Proposed Cryptocurrency-Tax Regulations

Earlier this year (April precisely), the taxation agency stated that it is yet to establish a value-added tax (VAT) for digital currencies, saying that: “The 2018 annual budget review indicates that the VAT treatment of cryptocurrencies will be reviewed. Pending policy clarity in this regard, SARS will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies.”

The proposed regulation contains a cogent information about VAT which implies that the agency, since it has excluded cryptocurrencies as financial services, it will not be charging VAT the following activities of the virtual currency sector which is to include: “issue, acquisition, collection, buying, selling or transfer of ownership of any cryptocurrency.”

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A partner at the taxation department of Hogan Lovells in South Africa, Natalie Napier, in her comprehensive analysis of the agency’s regulations as regards VAT, explained that:

“No VAT will be levied on any cryptocurrency, but SARS deems a cryptocurrency as assets of an intangible nature, and therefore SARS will continue to apply normal income tax rules to cryptocurrencies. Affected taxpayers are obliged to declare cryptocurrency their capital or revenue gains or losses as part of their taxable income.”

Virtual Currency Gain: Income or Capital?

Before April, which witnessed the release of the cryptocurrency regulation, the interest of the agency in regulating cryptocurrency created some “fuss in the air” as people started to debate and inquire If the agency intends to describe gains from cryptocurrency as an income or as capital.

Even a Senior Lecturer in the School of Accountancy at the University of the Witwatersrand, Asheer Jaywant Ram, was prompted to make a statement to this effect, stating that:

“I think there is enough interest and there is enough scope for SARS to be looking into this space, but now the question becomes – because SARS is really under pressure to reduce that deficit – are they really going to accept taxpayers declaring their gains as capital gains tax or are they going to just say it is all revenue in nature?”

However, it is crystal clear now what SARS intention is after the April release as it made its stance clear concerning what should be regarded as capital and income tax which is codified in the regulation. The taxation agency also released in an earlier statement that:

“Cryptocurrencies are not regarded by SARS as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, cryptocurrencies are regarded by SARS as assets of an intangible nature.”

The proposed tax regulations is an avid sign that the South African government is supporting cryptocurrencies as opposed to most African countries that are banning their use, apparently the African continent has been lagging behind in taking advantage of the fast-rising sector of cryptocurrency but South Africa can be regarded as foremost in the continent in relations to this subject-matter.

One can safely conclude that the local cryptocurrency users will most likely be too affected by the recently introduced South African cryptocurrency regulations on tax. However, others might see this as negative owing to the anonymity of cryptocurrency users in Africa, but apparently, it is a progressive development adding South Africa to list of countries with regulated cryptocurrency activities.

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