Q: The individual does not regularly trade in these investments, and this was a once off investment that he withdrew. He made a R120,000 gain on the withdrawal. Are the gains capital in nature and therefore need to be taxed at Capital Gains rates or normal income tax rates? What will be the tax implications?
A: We are not aware of any official SARS view (as made available publicly) in this regard. We accept that some taxpayers may have requested opinions form SARS, but that would not be in the public domain.
We accept that the client is not generating (referred to as mining the currency) the Bitcoin (as a cryptocurrency) once a block has been decrypted or (more likely) by simply buying it, exchanging physical currency for digital at a Bitcoin exchange like Mt. Gox or Bitstamp, or through a service like BitInstant. We have also only obtained information from the word-wide web and would like to emphasise that it is essential to understand the exact nature of the transaction here. If the person is mining the Bitcoin, it would be gross income when sold (or trading stock).
We submit that a cryptocurrency is NOT currency. We submit that the word ‘currency’ would take it ordinary meaning and the conversion would be done in terms of section 25D of the Income Tax Act and would be based on the expenditure incurred (or the cost of the asset). Section 24I may also apply.
The tax consequences, we submit, of acquiring the currency will follow from the basic rules (of gross income) and may in fact constitute a barter transaction. A resident of the RSA will have to account for all receipts or accruals in respect of the disposal of the bitcoin in annual return of income. The persons will, as in the case of all other receipts or accruals, bear the onus of proving that it is capital of nature, if that applies – you mention investment. With regard to the capital nature of the ‘investment’, the current growth in the value of the bitcoins, may well lean towards a speculative motive – at least in SARS’s view.
- January 2018