The National Treasury released new draft tax legislation for comment, proposing a number of amendments, including the value-added tax (VAT) treatment of cryptocurrencies. Following the media release issued by the South African Revenue Service (SARS) on the tax treatment of cryptocurrencies, it is now proposed that, for VAT purposes, a cryptocurrency will be treated as an exempt financial service for the purposes of the Value-Added Tax Act.
This is aligned with other jurisdictions, such as the EU, where transactions using cryptocurrencies are exempt despite the transaction being classified as the rendering of a service.
No VAT
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.
VAT is currently levied at the standard rate of 15% on the supply of goods and services by registered vendors, but a limited range of goods or services is either exempt or 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.
A business that only makes exempt supplies 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.
For the consumer, the proposal means that the vendor 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.
Income tax treatment
Although no VAT will be levied on any cryptocurrency, the income tax treatment of cryptocurrencies must be considered separately.
SARS stated in its April 2018 media statement that it deems a cryptocurrency as assets of an intangible nature.
According to SARS, normal income tax rules will continue to apply to cryptocurrencies and affected taxpayers will be expected to declare cryptocurrency 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.
Monitoring the use of cryptocurrencies
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 jurisdictions, the online platforms on which cryptocurrencies are traded are monitored and information can be collected accordingly.
The outcome of the newly proposed legislation is that there is some clarity regarding the tax and VAT treatment of cryptocurrencies.
However, with the complexity of transacting using cryptocurrencies, it can be expected that there will be further amendments and proposals.
Comments on the proposed changes are due by 16 August.
Hearings can be expected on the comments, which could result in amendments to the draft legislation, which is then published.
The draft legislation and any applicable amendments will then be enacted into law at a later date.