The blockchain and cryptocurrency sector provides excellent opportunities for tax revenue generation and employment growth. It would be a pleasant surprise if this year's Budget Speech contains new announcements regarding cryptocurrencies and blockchain technology.
With no shortage of economic crises to deal with, the Minister of Finance and National Treasury may well decide that they can continue to hold off on making serious policy moves in this sector. However, this would be a pity, as meaningful policy engagement with cryptocurrencies and blockchains could generate compelling opportunities to stimulate economic activity, drive prosperity, and raise tax revenue.
If Treasury were to make changes in these areas, here are some good places to start:
- First, the tax deduction for research and development expenditure should be re-instated for developers of cryptocurrencies and blockchains. This deduction was removed in 2018, seemingly by accident, and this change has served as a huge disincentive to innovation, entrepreneurship and job creation in this sector.
- Second, rather than trying to impose old income tax and capital gains tax rules and principles in this new and rapidly evolving sector, Treasury could consider imposing a flat "financial transaction tax" on cryptocurrency transactions. This tax could be set at a low flat rate, with cryptocurrency industry participants having floated the suggestion of a flat tax at 6%. This could also be introduced in conjunction with an appropriate third-party reporting regime and withholding rules, for cryptocurrency exchanges and other intermediaries facilitating cryptocurrency transactions – similar to the reporting regime governing stock exchanges and financial service providers, and the obligations of intermediaries to collect securities transfer tax (a financial transaction tax). This combined approach should make enforcement and compliance easier for the South African Revenue Service and the public, respectively, while boosting revenue collections and incentivizing further investment in cryptocurrency markets.
Apart from issues regarding tax treatment, there is a need for a more nuanced approach to the exchange control rules governing cross-border cryptocurrency transactions for corporate entities, which are currently not permitted at all. Again, concerns regarding potential abuse should be balanced against the stifling of legitimate commercial activity and investment. That said, changes or guidance in this regard are more likely to be announced separately from the Budget Speech.
In the face of difficult economic conditions and stagnation, we need to embrace new ideas and new industries. We therefore hope that the Minister has some pleasant surprises in store for us on 26 February.