The impact of new tax amendments on cryptocurrencies

"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 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 thereby eradicating the application of VAT-input claims on acquisition and corresponding VAT-output charges being levied on disposals. This amendment came into effect on 1 April 2019. 

3. Cryptocurrency held as capital investments

Unlike the aforementioned Income Tax and Value Added Tax amendments which predominantly apply to cryptocurrencies traded proactively, investment into cryptocurrency with the intention to hold such as capital assets (for a period longer than three years) will largely remain unaffected by the Amendment Act. Any profit made upon realisation of a cryptocurrency investment will result in income tax on capital gain being payable at your marginal rate and any capital loss incurred will ensure that such loss can, in future, be set off against potential capital gains realised from cryptocurrency investment.

Since cryptocurrency is a dynamic concept attracting both active traders and passive investors, one can expect the regulatory prescripts to continuously be amended as loopholes in the application and investment of cryptocurrency comes to the fore.