The South African government is looking into regulating the cryptocurrency industry. This section will focus on the South African Reserve Bank’s (SARB) white paper issued in 2014 about virtual currencies and Decentralized Convertible Virtual Currencies (DCVCs). This information is pulled from a 1 Feb 2018 article on GoLegal.

Is the use of cryptocurrency legal in South Africa?

The simple answer is YES. The complicated part would be to ask you: is whatever you are doing with the cryptocurrency legal? For most of us, the answer is also yes, it is legal. If that is the case, what is the position of the authorities? The cryptocurrency landscape in South Africa is, at the moment, largely unregulated. However, the South African Reserve Bank issued a white paper in 2014 outlining its position on what it called virtual currencies (VCs) and Decentralized Convertible Virtual Currencies (DCVCs).

Here are some points to note about cryptocurrencies in general from that whitepaper:

• Cryptocurrencies are not legal tender – according to the SARB’s definition, legal tender is simply the notes and coins that are officially issued by a bank (read section 3.2.3 of the white paper).
• • Since cryptocurrencies do not exist in physical form, they fall outside the realms of the above definition.
• • According to the SARB Act, 1989, the Reserve Bank governs and has sole right in the issuance and management of all currency in the form of coins and notes. These are legal tender, unlike cryptocurrency.
• • Therefore, the use of Bitcoin (and other cryptocurrencies) to make payments is not recognized by law. In addition, a merchant is allowed by law to refuse payment made in Bitcoin.
• The SARB does not have any objection to the use of DCVC’s (cryptocurrencies) – a clause in section 2.1 of the white paper authorizes that DCVCs can be used for the purposes of trading and in exchanges. For a cryptocurrency enthusiast, this means that we are free to trade and exchange bitcoin and other cryptocurrencies in South Africa.
• When we look at the comments in section 3.1.1 of the white paper, we note that DCVCs are recognized as a store of value. This means that Bitcoin or ETH could be converted to legal tender, just in the same way we use tokens or gift vouchers, but not as a legal form of payment.

How do Taxation laws affect cryptocurrencies in South Africa?

South African citizens will now be expected to pay income tax on their cryptocurrency trading as the South African Revenue Service (SARS) released a statement covering South African cryptocurrency tax laws on April 6, 2018. Affected taxpayers will be expected to declare their cryptocurrency gains and losses as part of their capital gains tax as well as any income derived in cryptocurrency as income tax. In the statement, SARS said: “The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties.”

In addition, South African taxpayers who are not certain about transactions involving digital currencies can seek guidance from SARS’ via channels such as Binding Private Rulings depending on the type of transaction.

Increased interest and use of cryptocurrencies brought about calls for SARS to give direction on how cryptocurrencies ought to be treated for tax purposes. Already, SARS has an existing tax system that they use and therefore, making a different one will not be necessary at the moment.

The existing tax framework will also be used to guide affected taxpayers on the tax ramifications of cryptocurrencies. The tax authority considers digital currencies such as bitcoin as “an Internet-based digital currency that exists almost wholly in the virtual realm”. The use of cryptocurrencies is supported by growth in the number of enthusiasts who see it as an alternative currency that can be used to pay for goods and services similar to traditional currencies.

Before SARS released this statement, the word “currency” was not defined in South Africa’s Income Tax Act and cryptocurrencies were therefore not considered as official South African tender nor widely accepted as a means of exchange or payment. SARS did not not previously consider cryptocurrencies as a currency for income tax purposes or Capital Gains Tax rather, they were regarded as assets of an intangible nature.

PREVIOUS INFO REGARDING TAXATION OF CRYPTOCURRENCY PRIOR TO APRIL 2018 STATEMENT:

Since digital currencies are not in the form of cash, their value can be determined to verify an amount accrued or received as envisioned in the definition of ‘gross income’ in the Income Tax Act. Besides, the Eight Schedule to the Taxations Act allows for such gains to be valued as capital in nature under the CGT paradigm. The existing jurisprudence allows for an accrual or receipt to be determined as revenue or capital in nature.

While SARS has figured out how to deduce tax from cryptocurrencies, they are yet to ascertain the Value-Added Tax (VAT) for cryptocurrencies. In their statement, SARS said: “The 2018 annual budget review indicates that the VAT treatment of cryptocurrencies will be reviewed. Pending policy clarity in this regard, SARS will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies.”

Firstly, taxation laws and principles apply to all income under South African revenue regulations. According to an advisory comment from Luno, a reputable trading platform in South Africa, all Bitcoin (cryptocurrency) earnings are subject to taxation and therefore the public is advised to always consult a registered tax professional to ensure he/she remains tax compliant.

Simply put, all transactions involving cryptocurrency, including income you may get from trading cryptocurrency, is subject to the general taxation laws and are therefore taxed.

Although the South African Revenue Service (SARS) does not specify how cryptocurrency transactions are to be dealt with, it is clear that all asset transactions attract some form of tax. When trading cryptocurrency, taxation laws do apply. This includes a possible capital gains tax, such as when you buy a bitcoin as an investment and then sell it at a profit, or alternatively, an income tax, where the transactions form part of your ordinary business activities. Ultimately, when deciding whether your crypto transactions will incur CGT or income tax, certain considerations will be taken into account, such as intent, the duration for which the asset is held, and how it was financed, along with a multitude of case law.

However, the Financial Markets Act of 2012 excludes virtual currencies (and this could include cryptocurrencies) from the definition of securities. They, therefore, do not fall under the regulatory standards applicable to trading securities.

Sources

• Everything you need to know about South African crypto regulation
• South African Revenue Service Announces New Cryptocurrency Tax Laws