BROADENING THE TAX SCOPE

by | Mar 1, 2021

The use of cryptocurrencies and other crypto assets is becoming increasingly popular, especially in an economic climate in which fiat currency exchange rates are unsteady and volatile. In the South African tax context, the authorities previously considered, to a large extent, only the tax treatment of cryptocurrencies. The intended tax treatment of cryptocurrencies has manifested in three distinct ways:

  1. The SARS announced, in a media statement issued on 6 April 2018, that it would apply normal income tax rules to cryptocurrencies, in terms of which specific regard will be to the revenue or capital nature of the cryptocurrencies held;
  2. Early in 2019, the Income Tax Act, 1962 (the Act), was amended to include cryptocurrencies in the definition of “financial instrument” in section 1(1). The Act was further amended to provide, in terms of section 20A, that the acquisition or disposal of cryptocurrencies will constitute a trade in respect of which any losses that are incurred will be ring-fenced; and
  3. In the Value-Added Tax Act, 1991 (the VAT Act), the definition of “financial services” was amended to include the issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency (see section 2(1)(o)

Given the renown of the concept of cryptocurrencies and their growing popularity, it is unsurprising that the lesser-known types of crypto assets have received much less consideration from the tax authorities. However, there are, at present, mainly four types of crypto assets, namely:

  • Cryptocurrencies;
  • Platform tokens or cryptocommodities;
  • Utility tokens; and
  • Transactional tokens.

Each of these types of crypto assets utilises cryptography and a public ledger to regulate the creation of new crypto asset units, to verify transactions, and to secure those transactions through the use of peer-to-peer networking, thereby eliminating the need for a “middleman”.

There has been significant speculation regarding how these other crypto assets will be treated for tax purposes and whether the tax treatment will be the same as that of cryptocurrencies. Many international jurisdictions are not drawing any distinction between the various types of crypto assets; it appears from the Taxation Laws Amendment Bill, 2020 (the TLAB), which was introduced in the National Assembly on 28 October 2020, that National Treasury has elected to follow suit. The TLAB proposes amendments to the definition of financial instrument in section 1(1) and to section 20A of the Act, which provisions will now make reference to the wider concept of crypto assets, rather than just to cryptocurrencies.

The statutory inclusion of all crypto assets in the relevant provisions of the Act suggests that the normal tax treatment that is to be applied to cryptocurrencies as per the media statement issued by SARS will apply equally to all types of crypto assets.

However, while the TLAB is proposing amendments to the provisions of the Act with regard to the taxation of crypto assets, there is no proposed amendment to the definition of financial services in section 2(1)(o) of the VAT Act. This has the effect that the Act will be widely applicable to all crypto assets, while the exemption provided for in the VAT Act will apply only to transactions pertaining to cryptocurrencies and not to transactions utilising other types of crypto assets.

It is uncertain whether this is an unintended oversight or whether it is intended that the exemption from VAT provided for in respect of financial services in the VAT Act be limited only to cryptocurrencies.