The advent of cryptocurrencies, and in particular the substantial gains that are associated with investments in cryptocurrencies, caught the attention and interest of the world – and not least of all, that of the taxman. Because where money abounds, tax is normally to be collected.  Sars recently issued a statement explaining its views on the tax treatment of cryptocurrencies.

In summary, Sars states that cryptocurrencies are not to be treated as currency for tax purposes, and that the normal tax principles should apply to cryptocurrencies as if they are intangible assets.  The reasons provided by Sars for the view above are that (a) cryptocurrencies are not official South African tender and (b) are also not widely used and accepted in South Africa as a medium of payment or exchange. The Sars view, and more specifically the basis for the Sars view, as to why cryptocurrencies are not tantamount to currency appears unscientific and potentially wrong.

The importance of the classification as currency or intangible asset Currency is not an asset for Capital Gains Tax (CGT) purposes, and as such, not susceptible to CGT upon disposal. Consequently, if cryptocurrency is currency, any capital gains upon disposal will escape the CGT net.

In contrast, intangible assets are, in principle, subject to CGT (or income tax).  Special tax rules apply to foreign currency gains and losses on “exchange items”. Generally speaking, these gains are taxed or losses are deductible, on an annual basis (and even if they are unrealised), except in the hands of non-trading trusts and natural persons.

A unit of (foreign) currency is an “exchange item” and thus, potentially, subject to these rules.  If, however, cryptocurrencies are not currency, these rules will not apply.  Capital or revenue nature of gains upon disposal of cryptocurrencies Sars indicated that the normal tax rules apply to categorise cryptocurrencies as trading stock or capital assets. Given the Sars preference to classify cryptocurrencies as intangible assets, and thus similar to shares in a company, a plethora of tax legislation may ensue to solve disputes about whether a cryptocurrency investment was held on capital or revenue account. Read more from…

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