Graeme Palmer of Garlicke & Bousfield

There are many different cryptocurrencies, the most well-known being Bitcoin. Bitcoin is a convertible virtual currency, in other words, it has an equivalent value in real currency and can be exchanged back and forth for real currency. Cryptocurrencies are growing in popularity with a market capitalisation in excess of $150 billion.

Only the South African Reserve Bank, which governs the management of currency, has the sole right to issue legal tender in the form of bank notes and coins. Although cryptocurrencies are not regarded as legal tender, they are completely unregulated, and there are no laws preventing anyone accepting them as payment. There are three ways of receiving cryptocurrencies, namely, buying them on an exchange, receiving them as consideration for goods or services, and “mining”.

Because there are no specific tax provisions that deal with cryptocurrencies, general tax principles will apply. In many respects, the taxation of cryptocurrencies is similar to that of Krugerrands. Krugerrands are generally purchased with an expectation of an increase in the gold price. Cryptocurrencies, like Krugerrands, can be purchased for a long-term capital investment or as an asset to generate short term profit. It is more likely that cryptocurrencies will be acquired for a short-term profit.

The dominant intention or purpose of the taxpayer acquiring the cryptocurrency should be considered. The enquiry should therefore be whether the cryptocurrency was acquired as an investment of a capital nature or as an operation of business in carrying out a scheme for profit-making resulting in a profit of a revenue nature on realization. If the cryptocurrency was acquired as a scheme of profit making the profits on disposal will be taxed as income.

If the cryptocurrency was acquired as a capital long term investment, the disposal will be subject to capital gains tax. Factors such as, a lengthy holding period, no history of dealing in cryptocurrencies, and purchasing for capital preservation rather than speculation, would suggest that the resultant profit is capital in nature.

It is important that taxpayers acquiring cryptocurrencies keep a record of the value of the realized profits. The Rand price of the cryptocurrency should be recorded at the time it is acquired. When the taxpayer either uses the cryptocurrency to purchase goods or sells it for Rands, tax would be applied on the amount by which the disposal value exceeds the acquisition value. If the taxpayer is purchasing goods with the cryptocurrency, the disposal value would be the value of the goods purchased.

This article has been written by Graeme Palmer, a Director in the Commercial Department of Garlicke & Bousfield Inc

NOTE: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of tax law.

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