An analysis of issues relating to the taxation of cryptocurrencies as financial instruments

Remerta Basson

doi:10.4102/jef.v13i1.487

Abstract

Orientation: This article examines the normal tax treatment of cryptocurrency transactions performed by natural persons in South Africa. Research purpose: The aim of this article was to document the normal tax treatment of cryptocurrency transactions subsequent to the inclusion of cryptocurrency in the definition of ‘financial instrument’ in section 1(1) of the Income Tax Act No. 58 of 1962, and to determine whether this inclusion gives rise to unanticipated issues. Motivation for the study: This investigation was necessitated by the distinguishing features of cryptocurrency that differentiate it from other financial instruments. Research approach/design and method: This article falls within the reform-orientated genre of doctrinal research. A desktop literature review was conducted to determine the normal tax treatment of cryptocurrency transactions, based on an interpretation of relevant legislation and a review of secondary commentary. Key issues identified in the normal tax treatment of cryptocurrency transactions were documented, and recommendations were made for addressing the issues identified. Main findings: A misalignment may occur between taxable incomes and economic gains of taxpayers engaged in cryptocurrency mining. Practical/managerial implications: The South African Revenue Service (SARS) should allow for a deduction equivalent to the market value of cryptocurrency acquired through cryptocurrency mining in terms of section 22(2)(a). Contribution/value-add: A risk of misalignment between taxable incomes and economic gains of taxpayers performing cryptocurrency mining has been identified and documented, which may inform legislative amendment, or the practice of the SARS.

Highlights

The definition of ‘financial instrument’ in section 1(1) of the Income Tax Act No 58 of 1962 (South African Government 1962) was amended by the Taxation Laws Amendment Act No 23 of 2018 to include ‘any cryptocurrency’
Cryptocurrency refers to a virtual currency, which is both protected by cryptography and exchangeable for fiat currency (Financial Action Task Force 2014:4–5)
Where a taxpayer can prove that cryptocurrency acquired through cryptocurrency mining constitutes a capital asset, the same provision is applied to such cryptocurrency if the initial receipt thereof was included in gross income in terms of paragraph (c) of the definition of ‘gross income’ in section 1(1) of the Act

Summary

Introduction

The definition of ‘financial instrument’ in section 1(1) of the Income Tax Act No 58 of 1962 (the Act) (South African Government 1962) was amended by the Taxation Laws Amendment Act No 23 of 2018 to include ‘any cryptocurrency’. Where a taxpayer can prove that cryptocurrency acquired through cryptocurrency mining constitutes a capital asset, the same provision is applied to such cryptocurrency if the initial receipt thereof was included in gross income in terms of paragraph (c) of the definition of ‘gross income’ in section 1(1) of the Act. Notwithstanding the above discussion, paragraph 42 of the Eighth Schedule provides that the proceeds from the sale of a financial instrument are deemed to be equal to the base cost thereof, where the financial instrument is disposed of at a capital loss and an identical financial instrument is acquired within 91 days. It is recommended that the SARS must provide guidance on record-keeping requirements to taxpayers conducting cryptocurrency transactions

Conclusion

Findings

Data availability statement