Broadening the scope of application: tax laws reaching further into the crypto-sphere

1. The South African Revenue Service (SARS) announced, in a media statement issued on 6 April 2018, that it will apply normal income tax rules to cryptocurrencies, in terms of which specific regard will be had to the revenue or capital nature of the cryptocurrencies held;
2. The Income Tax Act 58 of 1962 (ITA) was amended to include cryptocurrencies in the definition of “financial instrument”. The ITA was further amended to provide, in terms of section 20A, that the acquisition or disposal of cryptocurrencies will constitute a trade in respect of which any losses that are incurred will be ring-fenced; and
3. The Value Added Tax Act 89 of 1991 (VAT Act) amended the definition of financial services to include the issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency.

Given the renown of the concept of cryptocurrencies and their growing popularity, it is unsurprising that the lesser known types of crypto assets have received much less consideration from the tax authorities. However, there are, at present, mainly four types of crypto assets, specifically:

• Cryptocurrencies;
• Platform tokens or cryptocommodities;
• Utility tokens; and
• Transactional tokens.

Each of these types of crypto assets utilise cryptography and a public ledger to regulate the creation of new crypto asset units, to verify transactions, and to secure those transactions through the use of peer-to-peer networking, thereby eliminating the need for a “middleman”.

There has been significant speculation regarding how these other crypto assets will be treated for tax purposes and whether the tax treatment will be the same as that of cryptocurrencies. Many international jurisdictions have drawn no distinction between the various types of crypto assets and it appears from the 2020 Draft Taxation Laws Amendment Bill (Draft TLAB), which was published on 31 July 2020, that National Treasury (NT) has elected to follow suit. The Draft TLAB has proposed amendments to both the definition of financial instrument and section 20A of the ITA, which provisions will now make reference to the wider concept of crypto assets, rather than just cryptocurrencies.

The statutory inclusion of all crypto assets in the relevant provisions of the ITA suggests that the normal tax treatment that is to be applied to cryptocurrencies as per the media statement issued by SARS will apply equally to all types of crypto assets.

However, while the TLAB has proposed amendments to the provisions of the ITA with regards to the taxation of crypto assets, there has been no proposed amendment to the definition of financial services in the VAT Act. This has the effect that the ITA will be widely applicable to all crypto assets, while the exemption provided for in the VAT Act will apply only to transactions pertaining to cryptocurrencies and not to those transactions utilising the other types of crypto assets.

It is uncertain whether this was an unintended oversight or whether it is intended that the exemption from VAT provided for in respect of financial services in the VAT Act be limited only to cryptocurrencies. Clarity will have to be provided by NT in this regard and written public comment in respect of the proposed amendments in the TLAB may be submitted until 31 August 2020.