Natalie Napier discusses South Africa's draft tax legislation on cryptocurrencies

Afrika has seen policymakers in recent years pronouncing that Bitcoin, and by extension cryptocurrencies, are not legal in their respective countries. Countries such as Zimbabwe, in 2018, have gone as far as having their central bank not only issue a statement that cryptocurrencies are banned, but also seize operations of Zimbabwe's cryptocurrencies exchange, Golix.

However, thus far, South African regulators have stood out by providing guidance to businesses and the general population as far as cryptocurrencies are concerned. Recently, during April 2018, the South African Revenue Service (SARS) issued a release that any gains (or losses) in cryptocurrency holdings by South Africans will be taxed accordingly.

Following on from that statement, SARS has now issued draft tax legislation which affects cryptocurrencies. To understand what this draft legislation means for South African businesses, cryptocurrency exchanges, and people, I caught up with Natalie Napier, Partner at Hogan Lovells (a legal firm in Johannesburg, South Africa).

Cryptocurrencies legislation in South Africa

iAfrikan: To be clear, are cryptocurrencies legally considered as currency in South Africa?

Natalie Napier: No, SARS stated in its media statement issued in April 2018 that it deems a cryptocurrency as assets of an intangible nature.

The word “currency” is not defined in the Income Tax Act and according to SARS cryptocurrencies are neither official South African tender nor widely used and accepted in South Africa as a medium of payment or exchange.

As such, cryptocurrencies are not regarded by SARS as a currency for income tax purposes or Capital Gains Tax (CGT).

What are some of the key highlights from the draft tax legislation for cryptocurrencies?

Following the media release issued in April 2018 by SARS on the tax treatment of cryptocurrencies, new draft tax legislation was released by National Treasury on 16 July 2018 for comment. One of the proposed amendments is the value-added tax ("VAT") treatment of cryptocurrencies.

It is now proposed that a cryptocurrency will be treated as an exempt financial service for the purposes of the Value-added Tax (VAT) Act.

The implication of the proposed amendment is that no VAT will be levied on the issue, acquisition, collection, buying, selling or transfer of ownership of any cryptocurrency.

Beyond this, is there more to the draft tax legislation as far as cryptocurrencies are concerned?

The income tax treatment of cryptocurrencies must be considered separately to the VAT treatment.

No VAT will be levied on any cryptocurrency, but SARS deems a cryptocurrency as assets of an intangible nature and therefore SARS will continue to apply normal income tax rules to cryptocurrencies. Affected taxpayers are obliged to declare cryptocurrency their capital or revenue gains or losses as part of their taxable income.

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.

How does this affect cryptocurrencies exchanges?

VAT is currently levied at the standard rate of 15% on the supply of goods and services by registered vendors, but there is a limited range of goods or services which are either exempt or which are subject to tax at the zero rate.

Exempt supplies are supplies of goods or services where no VAT is levied and input tax may not be deducted on the VAT incurred to make exempt supplies. If a crypto exchange as a business makes only exempt supplies, it does not carry on as an “enterprise” for VAT purposes and is therefore unable to register as a vendor irrespective of the number or value of the supplies made. Other examples of exempt financial services include the provision of credit, life insurance, and the services of benefit funds such as medical schemes, provident, pension, and retirement annuity funds.

How will the changes affect day to day use of cryptocurrencies in South Africa?

The proposed changes will have a limited effect, if at all, on the day to day use of cryptocurrencies.

No VAT will be levied on the issue, acquisition, collection, buying, selling or transfer of ownership of any cryptocurrency and therefore, for all practical reasons, all these transactions will continue as before.

For the consumer, the proposal means that the consumer will not have to charge or collect any VAT when undertaking any transaction in respect of any cryptocurrency. The benefit of this is that there will not be any additional VAT charge which would increase the costs associated with transacting with cryptocurrencies.

In your opinion, is the draft legislation helpful or not?

The outcome of the newly proposed legislation is that there is some clarity regarding the tax and VAT treatment of cryptocurrencies.

The approach from SARS is aligned with other jurisdictions, such as the European Union, where transactions using cryptocurrencies are exempt despite the transaction being classified as the rendering of a service.

However, with the complexity of transacting using cryptocurrencies, it can be expected that there will be further amendments and proposals.

It is likely that comments will be made in respect of the proposed changes and these comments are due by no later than 16 August 2018. Once comments are received, there may be hearings relating to the comments which can potentially result in amendments to the draft legislation which is then published. The draft legislation and any amendments, if applicable, will only be enacted into law at a later date.

Any thoughts you'd like to share with policymakers?

Although governments are trying to regulate cryptocurrencies, one of the practical difficulties that may be encountered is how SARS will monitor the use of cryptocurrencies and the respective transactions. It will be useful to consider how other jurisdictions have monitored the use of cryptocurrencies. In certain foreign jurisdictions, the online platforms on which cryptocurrencies are traded are monitored and information can be collected accordingly.


Cover image credit: Natalie Napier, Partner at Hogan Lovells.

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