Part1: A financial revolution?

The rise of the bitcoin has been phenomenal, with one Bitcoin now worth over US$ 11,500 or R220, 000. Bitcoin was first introduced in 2009, but was first valued in 2010. A bitcoin user decided to use 10,000 units of these to buy two pizzas. These units are today worth over US$100 million. This must have been the most expensive pizza!

Bitcoin is a cryptocurrency. Cryptocurrencies are digital assets designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptography is synonymous with encryption; which is the conversion of information from a readable state to apparent nonsense. The sender and intended recipient share the decoding technique needed to recover the information sent, thereby ensuring that unwanted persons cannot decode the information. Cryptocurrencies use decentralised control as opposed to centralised electronic money and central banking systems.

2011 saw the introduction of more alternative cryptocurrencies known as altcoins (alternative coins) which aim to improve on the usability of the bitcoin. In 2014, the largest Bitcoin exchange Mt. Gox went offline, and 850,000 bitcoins disappeared and the owners lost out. At the time, these bitcoins were worth US$450 million and would be worth US$4,4billion today. These are the pitfalls of a currency designed to ensure anonymity and without central control. By last year, a Bitcoin was worth US$10,000; due to the increase in trade and places where the currency is accepted as a unit of exchange.

Regardless of its phenomenal success, Bitcoin is not universally accepted as currency or legal tender. This is because governments, central banks and business have no control over the supply of bitcoins. Traditional financial authorities have not backed it up as legal tender. The way bitcoin is traded has made it difficult for central banks and tax authorities all over the world to trace the trade and hold traders accountable for their gains or short-comings. Governments cannot cease Bitcoins as proceeds from illegal trade or as a forfeiture of assets for non-compliance with particular laws. What then are the tax implications of bitcoin trading? We will discuss this in the next article.