With virtual currencies such as Bitcoin becoming ever more
popular and accessible, it is important that South African
taxpayers carefully consider the tax and exchange control
uncertainties that accompany the incorporation of these relatively
new systems into businesses and/or investment portfolios. We
highlight below some of the tax and exchange control consequences
arising from transactions involving Bitcoin. We have not considered
the tax and exchange control consequences of the mining of Bitcoin,
as this will be considered in a separate article.
On 3 December 2014, the South African Reserve Bank
("SARB") issued a Position Paper on
Virtual Currencies (the "Position
Paper") indicating that Bitcoin "is a digital
representation of value that can be digitally traded and functions
as a medium of exchange, a unit of account and/or a store of value,
but does not have legal tender
status" (our emphasis). It is therefore not, of
itself, subject to regulation by the SARB. South African residents
nevertheless remain subject to South Africa's exchange control
regulations in general, and should take care that they do not
unwittingly contravene any of these regulations in their dealings
with Bitcoin. It remains to be seen how the SARB's approach to
Bitcoin develops over time.
The South African Revenue Service
("SARS") has not yet given any clear
indication of its views regarding Bitcoin. It is therefore not yet
clear whether SARS would consider Bitcoin to be a
"currency", a term which is not defined in section 1 of
the Income Tax Act, 1962.
In our view, however, until Bitcoin is officially recognised as
legal tender in South Africa or elsewhere, it is more likely that
it would be considered to be an "asset" to be dealt with
under the ordinary principles of the Income Tax Act. The
circumstances of the specific taxpayer in question would therefore
be of great importance in determining, inter alia, the
capital or revenue nature of trades involving Bitcoin, and
therefore, whether gains from such trade would be subject to income
tax or capital gains tax (and, conversely, whether losses will be
deductible or not).
In addition, the use of Bitcoin would require careful analysis from
a value-added tax ("VAT") perspective.
Where Bitcoin is used as consideration for the supply of goods or
services, and it is determined that Bitcoin may be viewed as an
asset rather than currency for VAT, the trade would likely be
treated akin to a barter transaction (ie, the VAT consequences of
two potentially vatable transactions would need to be determined).
Where Bitcoin is traded, ie, bought and sold for cash, the VAT
consequences for both parties would depend on a detailed analysis
of the exact facts of each case. This would be of particular
relevance to taxpayers that may exceed the VAT registration
threshold through their Bitcoin trades. The VAT consequences of the
particular trade would depend, inter alia, on whether the
trade of Bitcoin is considered the supply of a "good" or
"service", as defined in section 1 of the Value-Added Tax
Act, 1991 ("VAT Act"). The rights to
performance are personal rights against another person, rather than
rights in a thing (which are real rights). Personal rights are
incorporeal by their nature, and are classed as movable
property.
Personal rights are transferred by cession rather than by
traditio (as in the case of tangible, corporeal movable
assets) since, by their very nature, they are incapable of physical
delivery. The transfer of personal rights cannot be the supply of
"goods" as defined in the VAT Act, because those personal
rights are not "goods", being incorporeal by nature, they
are neither corporeal movable things, nor fixed property, nor a
real right in a corporeal thing or fixed property, nor electricity.
In our view, it is likely that Bitcoin constitutes an incorporeal
right, the sale of which should constitute the supply of a
"service" for purposes of the VAT Act.
Given the uncertainty and potentially significant tax and exchange
control implications that may arise in the context of trading in
and using virtual currencies such as Bitcoin, it is very
important for any party to a transaction that involves Bitcoin to
obtain advice on their specific circumstances prior to
implementation.
Jo-Paula Roman is a candidate attorney in ENSafrica's tax
department.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.