Taxing cryptocurrencies

Bitcoin and less well-known other cryptocurrencies such as Ethereum, are growing in popularity.

Graeme Palmer, a director in the commercial department of Garlicke & Bousfield Inc, said Bitcoin has a market capitalisation in excess of $150 billion.

Although cryptocurrencies are not regarded legal tender, they are completely unregulated, and there are no laws preventing anyone accepting them as payment.

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Palmer explained that, because there are no specific tax provisions that deal with cryptocurrencies, general tax principles apply.

There are three ways of receiving cryptocurrencies, namely, buying them on an exchange, receiving them as consideration for goods or services, and “mining”.

“In many respects, the taxation of cryptocurrencies is similar to that of Krugerrands,” Palmer said.

“Krugerrands are generally purchased with an expectation of an increase in the gold price. Cryptocurrencies, like Krugerrands, can be purchased for a long-term capital investment or as an asset to generate short-term profit. It is more likely that cryptocurrencies will be acquired for a short-term profit.

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“The dominant intention or purpose of the taxpayer acquiring the cryptocurrency should be considered. The enquiry should therefore be whether the cryptocurrency was acquired as an investment of a capital nature or as an operation of business in carrying out a scheme for profit making resulting in a profit of a revenue nature on realisation. If the cryptocurrency was acquired as a scheme of profit making the profits on disposal will be taxed as income.”

Palmer said that if the cryptocurrency was acquired as a capital long-term investment, the disposal will be subject to capital gains tax.

Factors such as a lengthy holding period, no history of dealing in cryptocurrencies, and purchasing for capital preservation rather than speculation, would suggest that the resultant profit is capital in nature.

It is important that taxpayers acquiring cryptocurrencies keep a record of the value of the realised profits. The rand price of the cryptocurrency should be recorded at the time it is acquired.

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When the taxpayer either uses the cryptocurrency to purchase goods or sells it for rands, tax would be applied on the amount by which the disposal value exceeds the acquisition value.

If the taxpayer is purchasing goods with the cryptocurrency, the disposal value would be the value of the goods purchased, Palmer concluded.

Disclaimer: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of tax law.