Part2: Bitcoin- the tax effect
We continue our discussion concerning the digital financial revolution headlined by emergence of Bitcoin as a medium of exchange. Today we look at the tax implications of trading with and in Bitcoin, and buying or selling cryptocurrencies.
On 6 April SARS issued a media release elaborating on its stance on Bitcoin and other cryptocurrencies and the tax effect. In the statement SARS reiterated that they will ‘’continue to apply the existing income tax rules to cryptocurrencies’’ and they expect taxpayers to declare cryptocurrency gains and losses as part of taxable income. Like with any other income, the responsibility lies with the tax payer to declare their income; the consequence of non-compliance is penalties and interest.
SARS felt it is not necessary to introduce new guidelines regarding cryptocurrencies and the consequent tax effect as current legislation can be used to enforce tax compliance. The South African Income Tax Act does not define what ‘’currency’’ is. Although cryptocurrencies like bitcoin are forms of digital currency and can be used as currency or a medium of exchange; they are not legal tender in South Africa. Thus SARS says it does not regard them as a currency for income tax purposes or Capital Gains Tax. Instead SARS considers cryptocurrencies as intangible assets, the same way shares, unit trusts etc. are regarded under the Income Tax Act. You own the asset, and have proof of ownership but it cannot be physically encountered by our natural senses.
So what happens when you produce and or sale goods in exchange for Bitcoin? Well the Income Tax definition of gross income is cash or otherwise, received by or accrued during the period of assessment; excluding amounts of a capital nature. Thus if you do use Bitcoin as a medium exchange in your trade, you will be required to declare this income; as income can take any form. For instance, living in a company house, or getting a car as a service award are all instances of receiving income payable under Income Tax regulations; thus surely Bitcoin is no different. Thus it is a matter of ascertaining market value of these receipts in local currency at for income tax reporting purposes. This also means that taxpayers can claim expenses associated with Bitcoin accruals or receipts as long as this expenditure is in the production of taxpayer’s income or for the purposes of trade. This means that if you also spent Bitcoin in production of Bitcoin income, you can also claim these expenses on your tax return.
There are instances where cryptocurrencies can be taxed under Capital Gains Tax, it is a matter of determining; using current legislation whether an accrual or receipt is revenue or capital. An example is if you gain bitcoin through mining or exchanging normal currencies for these; with the intention of holding the currency in anticipation of an appreciation of value. This results in a capital gain or loss if when you sell the Bitcoin, you gain more currency or less than when you initially bought the cryptocurrencies. This obviously works the same way as other assets like shares or unit trusts. On the other hand if you are a Bitcoin trader, then Bitcoin becomes your stock and income earned is of a revenue nature.