Page 44 - Q&A 2019/2020

The impact of new tax amendments on
cryptocurrencies

June 2019

“I’m an investor in cryptocurrencies and have found these to be an exciting
addition to my investment portfolio. However, I understand that there are new
tax regulations that will affect cryptocurrency. What should I be aware of in
this regard?”

Cryptocurrency has been largely unregulated in South Africa. Before any laws Commercial
could be put in place to determine the nature, taxation and acceptability of
transacting with cryptocurrencies as legal tender, the global phenomenon
had already swept through South Africa with many an investor grabbing at
the opportunity to invest in this new form of currency. Since the birth of the
concept of cryptocurrency and blockchain technology in 2009 the regulator
has tried to catch up and provide for regulatory and legal prescripts pertaining
to cryptocurrency, the latest of these being tax amendments passed into law
on 17 January 2019.
Until recently, the South African Revenue Service held that the nature of
cryptocurrency did not constitute acceptable legal tender and did not need
express regulation in terms of a new amendment law as it could be regulated
in terms of the existing rules governing intangible assets. However, in July 2018,
Treasury announced that it will indeed be proposing amendments to the existing
tax laws to speifically address cryptocurrency. This resulted in the promulgation
of the Taxation Laws Amendment Act 23 of 2018 (“Amendment Act”) in terms of
which the Income Tax Act and the Value Added Tax Act would be amended to
include cryptocurrencies within the ambit of their application.

These main amendments and their practical implications can be highlighted
as follows:

1. Income Tax Act amendments
The definition of a “financial instrument” as per the Income Tax Act will now
include cryptocurrencies and the provisions dealing with the ring-fencing of
assessed losses will also apply to cryptocurrencies. This will have the effect that
investors cannot offset their losses incurred from the dealing in cryptocurrencies
against any other trade and such losses can only be applied towards future
gains made in dealing in cryptocurrencies.

2. Value Added Tax Act amendments
The inclusion of cryptocurrencies under the definition of “financial services” will,
in essence, result in the “issue, acquisition, collection, buying or selling or transfer
of ownership of any cryptocurrency” being treated as a VAT-exempt supply

38