Taxation of cryptocurrencies: Buying and selling Bitcoin

Jonathan Purnell from Norton Rose Fulbright.

With Bitcoin’s popularity and value growing significantly, many wonder how cryptocurrencies will be treated by the South African Revenue Service (SARS) and other regulators.

Bitcoin is one of hundreds of different cryptocurrencies in existence. Cryptocurrencies are unregulated, decentralised digital currencies which can be bought, sold and traded for fiat money or goods and services.

According to the South African Reserve Bank (SARB), cryptocurrencies are not considered legal tender because only SARB is authorised to issue legal tender in South Africa. This means that creditors are not obliged to accept Bitcoin (or any other cryptocurrency) in settlement of their debts as they are obliged to accept Rand.

Although no legislation exists which prevents individuals from accepting cryptocurrencies as payment, SARB identifies a number of risks associated with cryptocurrencies, including an increased risk of money laundering and the legal uncertainty caused by the lack of regulation. SARB also states that holders are vulnerable due to market volatility and the potential for technological failure or tampering. For these reasons, cryptocurrencies are used or accepted at the users’ risk.

There are three ways to acquire cryptocurrencies:

• purchasing through an exchange;
• receiving it as consideration for goods or services through commercial activities;
• and so-called ‘mining’.

This article deals with the taxation of the first two ways of acquiring cryptocurrencies.

Currently, South Africa’s tax legislation does not specifically deal with cryptocurrencies. If we accept SARB’s position, cryptocurrencies are not legal tender or currencies but would qualify as assets and be subject to general tax principles.

On this basis, the taxation of a profit made on the disposal of Bitcoin is likely to depend on whether the Bitcoin was held on revenue or capital account. In determining this, the law looks to the owner’s intention. When an asset is held to generate profits, such asset is held as an income-generating asset (on capital account) and any profit realised on the disposal of the asset will be subject to capital gains tax.

Where an asset is held with the intention of selling it for profit, such asset is held on revenue account and those profits will be subject to income tax. SARS is likely to adopt the position that all Bitcoin is held ‘in a scheme of profit-making’ and is therefore revenue in nature. This is because any gain is realised upon disposal, although the issue is not clear-cut.

Taxpayers who are unhappy with such a ruling would be required to present objective evidence to SARS that their Bitcoin was held on capital account for investment purposes and that any profit made on the disposal should be subject to capital gains tax.

Cryptocurrencies would qualify as assets and be subject to general tax principles.

The valuation of the realised profits also requires consideration. Where Bitcoin is bought on an exchange, the value of the Bitcoin (at the Rand price at the time of acquisition) must be recorded. When that Bitcoin is used to purchase goods or sold for Rand, tax will be applied on the amount by which the disposal value exceeds the acquisition value at your marginal rate. In relation to the purchase of goods, the disposal value would be the market value of the goods acquired.

As Bitcoin is fungible and divisible into fractional units, it is impractical to track the value of each specific unit though this is theoretically possible. However, no specific guidance from SARS exists on how these values are to be tracked. We would therefore recommend that trading stock rules such as the first-in-first-out method is utilised in tracking the acquisition and disposal values in these situations as this is used with other assets with volatile market values. The first-in-first-out method, in this context, is based on the assumption that the first cryptocurrencies acquired will be the first cryptocurrencies sold. Therefore, where I purchase 0.004 Bitcoin for an amount of R240 today and 0.0005 Bitcoin for R26 tomorrow, regardless of which units I spend the following day, the acquisition value of the first 0.004 Bitcoin will be R60 000 per Bitcoin (R240 divided by 0.004) and all units spent after that will have an acquisition value of R52 000 per Bitcoin (R26 divided by 0.0005).

If you receive Bitcoin as payment for providing goods or services, the full Rand value of that Bitcoin at the time of receipt will be subject to tax at your marginal rate as if you had received an asset in consideration for the goods or services in question.

However, as the global understanding of cryptocurrencies is constantly developing, technical know-how and experience is needed to navigate this new and volatile legal landscape that our modern era has created. In this fast-paced environment, the above conclusions may change as the regulators and legislators catch up with this new technology.