While Bitcoin and other cryptocurrencies may not officially be recognised by the Reserve Bank, there may still be tax considerations.
This is according to Robert Gad, Nicolette Smit, Megan McCormack and Jo-Paula of ENS Africa’s tax division.
On 3 December 2014, the South African Reserve Bank issued a Position Paper on Virtual Currencies stating that Bitcoin “is a digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account and/or a store of value, but does not have legal tender status”.
It is therefore not, of itself, subject to regulation by the Reserve Bank.
This means it is also not yet clear whether SARS would consider Bitcoin to be a ‘currency’, a term which is not defined in section 1 of the Income Tax Act, said ENS.
“In our view, however, until Bitcoin is officially recognised as legal tender in South Africa or elsewhere, it is more likely that it would be considered to be an ‘asset’ to be dealt with under the ordinary principles of the Income Tax Act.”
“The circumstances of the specific taxpayer in question would therefore be of great importance in determining, the capital or revenue nature of trades involving Bitcoin, and therefore, whether gains from such trade would be subject to income tax or capital gains tax (and, conversely, whether losses will be deductible or not),” ENS said.
Value-added tax (VAT) is also a serious consideration for those who use Bitcoin in South Africa, said ENS.
Where Bitcoin is used as consideration for the supply of goods or services, and it is determined that Bitcoin may be viewed as an asset rather than currency for VAT, the trade would likely be treated akin to a barter transaction (ie, the VAT consequences of two potentially taxable transactions would need to be determined).
Where Bitcoin is traded, ie, bought and sold for cash, the VAT consequences for both parties would depend on a detailed analysis of the exact facts of each case.
This would be of particular relevance to taxpayers that may exceed the VAT registration threshold through their Bitcoin trades, said ENS.
“The VAT consequences of the particular trade would depend, on whether the trade of Bitcoin is considered the supply of a ‘good’ or ‘service’, as defined in section 1 of the Value-Added Tax Act.”
“Given the uncertainty and potentially significant tax and exchange control implications that may arise in the context of trading in and using virtual currencies such as Bitcoin, it is very important for any party to a transaction that involves Bitcoin to obtain advice on their specific circumstances prior to implementation,” ENS said.