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Tax loophole for Bitcoin trades in SA

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 26 Jan 2018
SARS will clarify the tax implications of transacting in crypto-currencies early this year.
SARS will clarify the tax implications of transacting in crypto-currencies early this year.

Although the South African Revenue Service (SARS) has indicated it is looking to track and tax Bitcoin trades, without tighter regulations, it will be difficult for the taxman to hold individuals to account for their taxes.

International law firm Allen & Overy says SARS will need to rely on the individual to accurately and honestly identify the tax consequences in their annual tax returns.

Earlier this month, SARS spokesperson Sandile Memela told ITWeb that the revenue authority will clarify the tax implications of transacting in crypto-currencies like Bitcoin in either an interpretation or practice note early this year.

This comes as crypto-currencies are gaining massive traction in SA, as Bitcoin's value surged dramatically over the past couple of years. Although Bitcoin has been highly volatile, it rose 10-fold in 2017 alone and has averaged annualised gains of over 400% since July 2010.

South African industries were initially slow to react to the use of Bitcoin; however, this is changing rapidly as an increasing number of companies are deciding to use Bitcoin, says Allen & Overy.

SA currently has two Bitcoin exchange platforms: Luno and Icecube. These platforms accept bank deposits in exchange for Bitcoins which, thereafter, may be used to trade or purchase goods and services from vendors that accept the crypto-currency as a method of payment.

No specific laws

Due to the very recent emergence of virtual currencies or crypto-currencies in SA, there are currently no specific laws or regulations that deal with the use of crypto-currencies, says Allen & Overy.

It follows that, to date, there isn't any court ruling or directives that focus on the tax treatment of Bitcoin-related transactions, it adds.

The law firm points out that SARS should amend the definition of the term "asset" in the Income Tax Act to explicitly include virtual currencies.

"As Bitcoin is not yet widely accepted as a medium of exchange, it seems unlikely to be classified as currency. It would be prudent to follow international practice on this matter and classify Bitcoin as an asset, such that taxpayers will be taxed using the existing tax legislation.

"Whilst Bitcoin trading may still go unregulated, [the above practice] provides South African taxpayers certainty in its tax treatment and should have a positive effect on taxpayers reporting in their annual tax returns," says Allen & Overy.

Lorien Gamaroff, CEO of Bankymoon.com, says if there are capital gains or income earnings on trade, then according to existing legislation, SARS should be made aware of these.

He points out that taxation on crypto-currencies is not defined yet and so existing laws apply. According to Gamaroff, the South African Financial Blockchain Consortium is working with SARS to come up with a set of policies to govern crypto-currencies.

International practice

In predicting how SARS will tax Bitcoin transfers, one should consider the international practice on the taxation of Bitcoin as a starting point, Allen & Overy says.

In the US, it says, the Internal Revenue Service (IRS) defines virtual currency as a "digital representation of value that functions as a medium of exchange, a unit of account or a store of value". For federal tax purposes, virtual currency is treated as property, so existing tax principles will apply to virtual currency transactions.

The IRS treats any disposal of property as a capital gain or a capital loss. Therefore, if a taxpayer holds virtual currency as a capital asset, then that taxpayer may realise a capital gain or loss on the sale or exchange of that virtual currency.

According to the law firm, American tax reporting requirements will apply to Bitcoin transactions as are applicable to any other transaction involving property. It is important to note the IRS requires a taxpayer who "mines" Bitcoin to include the fair market value of the Bitcoin as gross income in their taxable income.

In Australia, the Australian Taxation Office considers Bitcoin transactions as being akin to barter transactions and is of the view that Bitcoin is neither money nor a foreign currency. Further, the supply of Bitcoins is not a financial supply for the purposes of goods and services tax.

Meanwhile, crypto-currencies took centre stage at the World Economic Forum in Davos this week, with politicians calling for more regulation to prevent them being used for criminal activity.

International Monetary Fund MD Christine Lagarde said mining crypto-currencies is far too energy-intensive and is consuming as much electricity as a G-20 economy.

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