The Taxation of Income from Cryptocurrencies in Various Jurisdictions (Part 9): South Africa

By Graeme Saggers and Simphiwe Mili, Nolands

There has been a prominent controversy around the issue of cryptocurrencies in South Africa. On 6 April 2018 the South African Revenue Service (SARS) released a statement presenting the position that they had chosen to adopt on the treatment of cryptocurrencies for the purposes of determining taxable income.

Briefly, it suggested that SARS would continue to tax cryptocurrencies under normal tax rules. What this essentially means is that any gains and losses on the disposal of cryptocurrencies would be included in the taxable income of the taxpayer, depending on the intention of the taxpayer. One of the main areas of tension around the treatment of cryptocurrencies in South Africa arises from the fact that they are not regarded as legal tender there because they are not a popular means of value exchange. Therefore, SARS did not consider cryptocurrencies as currency for Capital Gain Tax (CGT) purposes (in South Africa currency is not an asset and is not susceptible to capital gains tax), had then decided to regard them as an “intangible asset”.

According to SARS, although not cash, cryptocurrencies can generally be an amount that can be valued in cash and so included as per the definition of gross income in Section 1 of the Income Tax Act of 1962 (The Act). What SARS essentially stated is that the nature of the asset in the hands of the taxpayer depends on the intention of that taxpayer when acquiring it. If it is speculative, it has revenue in nature, and if it is an investment, it has capital intention. However, on 16 July 2018, the draft Taxation Laws Amendment Bill (draft TLAB) was duly published and issued to the public for comment. Stated herein is the proposal to treat cryptocurrencies as financial instruments. This proposal aims at including the definition of financial instruments under three areas namely:

  • The definition of financial instruments under The Act.
  • The definition of financial services under the VAT Act.
  • The ring-fencing provisions of assessed losses under Section 20A of The Act.

The draft TLAB incorporating the above provisions is expected to be promulgated in January 2019.

Financial instruments

The proposal in the draft TLAB is to include cryptocurrencies under the definition of financial instruments in Section 1 of the Act. This inclusion will affect various sections of the Act. One of them is Section 22, which acknowledges what amounts need to be taken into consideration with the valuation of trading stock in the determination of taxable income. Specifically, Section 22(1) excludes financial instruments in the valuation of closing stock.

There may also be potential capital gains implications due to the inclusion of cryptocurrencies to the definition of financial instruments; particularly, within Para.42 of the Eighth Schedule, which deals with the taxation of shortterm disposals and acquisition of identical financial instruments. This section essentially acts as an antiavoidance section that mitigates what is colloquially known as “wash sales”, which is an instance where financial instruments are disposed of at the end of the assessment year so as to realise capital losses. Considering the nature and the volatility of the market at this stage it is more likely that traders would be susceptible to using the cryptocurrencies this way. The proposal is to, therefore, ensure that traders who hold cryptocurrencies as capital assets will be treated as having disposed of the asset for proceeds equal to the base cost.


A very significant aspect is the VAT implication of the classification of cryptocurrencies as financial services in the South African tax context. If we take an in-depth look at the provisions of the VAT Act, loosely stated, money is defined as any coins and paper money that the South African Reserve Bank (SARB) has issued in the Republic as a legal tender, or any coins or paper money of a country other than South Africa which is used or circulated as currency. Cryptocurrencies would not fall into the definition of “money” for the purposes of VAT in South Africa as they are not issued by the SARB, and are not a currency of any other country. A further area of tension was whether the cryptocurrencies would fulfil the definition of a “good” or a “service” as per the VAT Act. A good herein is defined as any physical moveable thing, fixed property, any real right in any such thing or fixed property and electricity. It is also apparent that cryptocurrencies do not fulfil the definition of a good as per the VAT Act. However, a service defines anything done or to be done, including the granting, assignment, cession or surrender of any right or the making available of any facility or advantage. With the service definition being quite wide and in the absence of any specific exclusion from the definition regarding cryptocurrencies, it is likely to be defined as a service for the purposes of VAT. It is also the stance that the National Treasury has opted to adopt and as such has proposed that all activities that encompass the purchase, selling, issue, acquisition, collection or transfer of ownership of cryptocurrencies would be deemed to be a “financial service” as per Section 2 of the VAT Act. Furthermore, if the proposal that cryptocurrency-related activities are financial services is approved, such activities would be exempt from VAT, as per Section 12(a) of the VAT Act.

This has a very layered implication for all taxpayers dealing with cryptocurrencies and various connotations for both the party selling the cryptocurrency and the party receiving it. Firstly, if the cryptocurrencies are exempt from VAT then naturally no VAT will be payable on the sale or supply of the cryptocurrencies. Secondly, the supplier of the cryptocurrency will not be required to register for VAT, despite their trading income exceeding the ZAR 1,000,000 threshold Section 23 of the VAT Act requires. Simultaneously, there will be no expenses” deduction as far as expenses incurred in relation to such activities are concerned. Thirdly, in an event where a taxpayer uses a cryptocurrency as a means to obtain a good or a service, then the particular payment itself will not have any VAT consequences. However, if the taxpayer is registered for VAT, they may deduct the VAT charged by the goods’ supplier, or the services are acquired for the purposes of making taxable supplies. If a supplier of goods or services accepts cryptocurrencies as payment, they must convert this into South African Rands (ZAR) which will be an amount duly reflected on an invoice that they issue to said purchaser. The VAT amount in the tax invoice will be an amount that can be claimed for output VAT by the supplier. If there is a change in the value of the cryptocurrency between the date of the invoice and the date of payment, then the gain or loss will be ignored for the purposes of VAT. Finally, for taxpayers that trade in cryptocurrencies on an exchange platform, those particular trades will be exempt from VAT. However, the fees and the commission amount payable as a result thereof will still be subject to VAT, and the person who traded in the cryptocurrencies will not be entitled to deduct input tax.

Assessed losses

This particular proposal is likely susceptible to an unpopular response from South African taxpayers. The proposal is that National Treasury includes the gains and losses from the disposal and acquisition of cryptocurrencies under the ringfencing of assessed loss provisions. It is per the provisions of the Section 20A(2)(b) that lists specific trades as “suspect trades”. The section also provisions that a loss from a “suspect trade” is automatically ringfenced unless that particular taxpayer would be able to indicate that there is a reasonable prospect of making a profit from that trade. Taxpayers will, therefore, only be able to utilise assessed losses against profits made from the cryptocurrencies. Given the volatility of the crypto-market at this point this is not entirely favourable for taxpayers, but it is a mechanism where SARS aims at mitigating the negative effect of these losses on the revenue targets. What should be noted, however, is that this particular proposal will not affect taxpayers who intend to hold the cryptocurrencies as capital assets. Taxpayers who hold the assets as capital assets will be able to offset their capital loss against other capital gains but will still be subject to the provisions of Para.42 of the Eighth Schedule as mentioned above.

In summary, the message from SARS clearly states that cryptocurrencies should be treated in the same way as any other financial asset. The complication, however, is that there is no definition for “cryptocurrency” in the South African legislation and time will tell whether this will raise more interpretive issues.

Graeme Saggers

Graeme Saggers

Nolands, more than 10 offices throughout Africa
T: +27 21 658 6600
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Graeme Saggers is the Head of Tax for Nolands. He holds a BCom (Hons) degree from Rhodes University and a MCom (Tax) degree from the University of Cape Town. Graeme qualified as a Chartered Accountant in 2009 after completing his articles at KPMG. He joined Nolands in 2011 as an Audit Manager and was appointed as a Tax Partner at Nolands in September 2014.

Nolands is an international auditing firm located in eleven offices in all major centres in Africa. Nolands employs almost 200 people and is focused on providing the best possible solutions for its clients. The company prides itself on being “not ordinary” and on its ability to integrate services and respond rapidly to clients’ needs.
Simphiwe Mili

Simphiwe Mili

Nolands, more than 10 offices throughout Africa
T: +27 21 658 6600
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Simphiwe Mili is a trainee tax consultant at Nolands. Simphiwe holds a BCom (Hons) degree in Tax from the University of Cape Town and is currently completing her Masters in South African Income Tax at the University of Cape Town.

Published: Spring 2019 

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