In general, from a tax perspective, extremely little has been written regarding the income tax and VAT treatment of cryptocurrency to date. With cryptocurrency being a relatively new phenomenon, the South African Revenue Service (“SARS”) has to date issued very limited guidance on the tax treatment thereof. In the main SARS has limited its feedback to the income tax treatment of cryptocurrency merely stating that the normal rules regarding whether an amount received or accrued in respect of cryptocurrency disposed of constitutes gross income should be applied. For income tax purposes, cryptocurrency is viewed as a financial instrument. The Income Tax Act No. 58 of 1962 (‘the IT Act’) does not provide any definition of the term ‘cryptocurrency’.
From a VAT perspective, the only reference to cryptocurrency can be found in the definition of ‘financial services’ in section 2 of the Value-Added Tax Act. No 89 of 1991 (‘the VAT Act’) and no other section or provision define or specifically refer to cryptocurrency or the VAT treatment thereof.
As such, it is submitted that one has to apply the ordinary rules of VAT to determine the VAT treatment of cryptocurrency and transactions related thereto. This requires an analysis and application of the general VAT sections dealing with the imposition of VAT.
It should be noted further that in the investment industry it is of critical importance to ascertain whether the investment management entity acts as an agent on behalf of an investor or as a principal. The simple nuance is that when acting as an agent, ownership of the ‘investment product’ vests in the investor, and the investment entity merely buys/sells the investment assets on the investors’ behalf from another entity (never obtaining ownership of the underlying asset), whereas with a principal-to-principal transaction, the investor buys and sells directly from/to the investment management company i.e. ownership of the investment asset is exchanged between the investor and the investment company.
Various different types of cryptocurrencies (such as Bitcoin, Ethereum, XRP etc.) have made their way into digital wallets and have been traded across the globe. As the VAT treatment of these types of ‘digital assets’ are not clear-cut, it is best to obtain formal advice from a qualified tax specialist in order to mitigate the risk of SARS asking for its pound of flesh (or crypto…).