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The word “cryptocurrency” was replaced with “crypto asset” in line with the proposed adoption of a uniform definition of crypto assets within the South African regulatory framework.

A crypto asset is defined as a digital representation of value that is not issued by a central bank but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment, and other forms of utility, and applies cryptography techniques in the underlying technology.

There are various crypto asset types in the market. These are commonly known as cryptocurrencies, such as Litecoin, Ripple, Bitcoin, and Ethereum. With crypto assets, you will need to use cryptographic techniques to access digital assets, which act as a medium of exchange for all financial transactions. 

Other crypto asset classifications are utility coins, security coins, and cryptocurrencies. The currency is secured to create additional units and transfer assets. Most of these currencies are on blockchain technology.

Characteristics of crypto assets

A more straightforward way to understand crypto assets is that they are digital assets. What is confusing is that not all digital assets are crypto assets. So, how do you distinguish the difference:

  • Crypto assets use cryptography.
  • This kind of asset depends on distributed ledger technology.
  • You do not need a third party such as a bank, to issue crypto assets like what happens with bitcoins.
  • Crypto assets have three primary uses: an investment, a means of exchange, and access to goods and services.

Is it necessary to pay tax on crypto assets?

Normal income tax rules apply to crypto assets, and affected taxpayers need to declare their gains or losses as part of their taxable income.

The onus is on taxpayers to declare all crypto assets-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 it work?

Following standard income tax rules, income received or accrued from crypto assets transactions can be taxed on revenue account under “gross income”.

Alternatively, such gains may be regarded as capital in nature. Determination of whether an accrual or receipt is revenue or capital in nature should be tested under existing jurisdiction.

Taxpayers are entitled to claim expenses associated with crypto assets accruals or receipts, provided such expenditure is incurred in the production of the taxpayer’s income and for purposes of trade.

Base cost adjustments can be made if falling within the CGT paradigm. Gains or losses in relation to crypto assets can broadly be categorised with reference to three types of scenarios, each of which potentially gives rise to different tax consequences:

  • Crypto assets can be acquired through so-called “mining”. Mining is conducted by verifying transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms.
  • Investors can exchange local currency for a crypto asset (or vice versa) through crypto assets exchanges, which are essentially markets for crypto assets, or through private transactions.
  • Goods or services can be exchanged for crypto assets. This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply.

How is SARS tracing crypto asset transactions?

Legislatively, SARS is granted a wide range of collection powers in terms of the Income Tax Act, including a requirement for third-party service providers to submit financial data.

Prepared by CORE TAX

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