February 23, 2018

Is SARS spectator to the Bitcoin boom?

 

In the same doubting way you are looked at today if you declare to anyone that you do not have a Twitter handle or Instagram account, you risk the same (if a not more intense) doubting look if you declare never to have made a killing by trading in virtual currency, especially Bitcoin.

Every other person you talk to boasts about how much they have made while trading in crypto currency. Those who swear by it love its anonymity and the fact that it is not regulated by any central banking authority. The demand of the crypto currency basically determines the price.

While Bitcoin is gaining massive traction in South Africa and globally, SARS finds itself in an unenvious position, a helpless and an involuntary spectator to the profits game that it should not only be part of, but in which it should be making the rules.

Neither The South African Reserve Bank nor SARS recognises Bitcoin or any other form of virtual currency like Ethereum and Litecoin as legal tenders. In fact, there is no existing regulatory framework from SARS or the legislature dealing with the tax implications of trading in virtual currencies. Necessarily therefore, there is also no case law one can have recourse to for guidance.

Reliance is placed on individual taxpayers to voluntarily, accurately and honestly account for their income relating to Bitcoin in their annual returns. Whether this actually happens will by and large depend on the citizenry’s view whether their taxes are employed appropriately. This is especially even more so if regard is had to the fact that traders on crypto currency are attracted to this mode of transacting because of the freedom it affords them to trade anonymously.

I am particularly reminded of my blog written in 2015 about SARS’s need to bring electronic goods and services purchased over the internet within the tax fold. One must now accept that the law is always trying to catch up with technology. It is no surprise that SARS is also currently exploring ways to adequately bring trade in crypto currency within the tax fold. This as virtual currency trade has been ongoing for years now. SARS has promised to issue an Interpretation or Practice Note to assist taxpayers in complying with their tax obligations as well as to deal with recalcitrant taxpayers who will want to neglect their tax obligations.

In the absence of specific laws regulating Bitcoin trading, the default position will prevail, which is that Bitcoin is treated as an asset in the hands of the Bitcoin trader, with the result that, on its disposal, if the proceeds made from the disposal exceed the asset’s base cost, a capital gain will be realised. Conversely, on disposal of the asset/Bitcoin, if the proceeds derived therefrom are less than the base cost of the asset, a capital loss will be realised.

If, however, the same Bitcoin is held by the trader as his trade-in-stock, the proceeds will invariably be revenue in nature. As case law has demonstrated, the intention of the taxpayer is decisive in this case. It must here be remembered that capital gains are taxed at a lower effective tax rate than ordinary income.

For now, and while we await the Interpretation or Practice Note from SARS, and even as it is accepted as the default position that crypto currency is treated as an asset, the definition of “asset” in paragraph 1 of the Eighth Schedule to the Act should still be amended to specifically include or incorporate virtual currencies like Bitcoin within the definition of the word “asset”.

Currently an “asset” is defined as:

  • property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from Gold or Platinum; and
  • a right or interest of whatever nature to or in such property

 

Frank Setati
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