South Africa is known to have a forward-thinking constitution. It was the first African country and the fifth country in the world to legalize same-sex marriage in 2006, and one of the first African countries to legalize cannabis (both recreationally and medicinally) in 2018 among a handful of other international countries. One wonders then, how will the cabinet view cryptocurrencies. Let’s explore how will regulation in South Africa work compared to other countries.
What Are Cryptocurrencies?
If you’re new around here, welcome. Before we go any further let’s look at what cryptocurrencies are and what defines them. It first started over a decade ago when a mysterious Satoshi Nakamoto released a white paper outlining a new payment system he had created to combat any further global financial crises (it was created in response to the 2007 – 2009 one). The first cryptocurrency to come into existence was Bitcoin, launching in early January 2009. Since then an entire industry has blossomed and over 8,000 different cryptocurrencies exist today.
So, what are cryptocurrencies? Cryptocurrencies are digital currencies that hold value and can be sent and received without the need for a middleman, essentially making them peer to peer currencies. While some currencies hold more value than others, the industry has grown to an incredible value, worth over $1.1 trillion. So while Bitcoin is a cryptocurrency, so is Ethereum, Tether, Tron, XRP, etc. When we talk about cryptocurrencies it covers any currency that only exists in the digital realm.
Cryptocurrency Regulations In Other Countries
Before we start comparing how regulation in South Africa will work compared to other countries, let’s take a look at other country’s regulatory laws.
Known for being very crypto forward, Japan’s National Tax Agency looks at crypto as any other payment method. Considered to be “asset-like values”, traders are liable to business income tax on all trading profits.
Switzerland also has a crypto forward look view on taxing cryptocurrencies. Individuals who trade and invest are exempt from any capital gains tax, professional traders however are subject to business tax, while crypto miners are subject to self-employment tax. In some regions Switzerland even allows citizens to pay their taxes in cryptocurrencies.
There are a few countries where traders are not liable to pay tax on their cryptocurrency, Portugal being one of them (almost). Only businesses are subject to pay tax on trading profits while individuals are let off the hook.
Not hugely uncommon, cryptocurrencies in the United States are regarded as property. This means that traders are liable to pay capital gains tax on all profits and losses made.
And finally, Germany offers another unique approach only charging tax on profits made within a year. If traders or businesses sell the cryptocurrency within a year they are liable to 25% capital gains tax while if sold outside of a year of purchase they are not liable at all.
How Will Regulation In South Africa Work Compared To Other Countries?
According to a recent release of the tax act by the South African Revenue Service (SARS), Bitcoin and other cryptocurrencies are not viewed as currencies or properties. Instead they are considered to be “assets of an intangible nature”, and any income made from cryptocurrencies will be considered gross income.
According to the 2018 tax act, users who buy and sell cryptocurrency short term with the intention of earning regular income are liable to income tax, while long term holders (typically 3+ years) are subject to capital gains tax.
In the case of capital gains taxes, individuals are taxed on profits made according to the price the cryptocurrency was bought at and then later sold at. Individuals may also use losses to decrease their tax bill. And best believe SARS is watching. The regulatory body announced in 2020 that they will be tracking cryptocurrency transactions, “expanding their cryptocurrency audit and detection services”.
While some countries work off of a LIFO (last in first out) method of reporting crypto related tax, South Africa calls for FIFO (first in first out) approach. This means that unlike stocks that are based on an average yearly price, cryptocurrencies are looked at based on the price at which they were bought, and the price at which they were sold.
Crypto mining is taxed as income, but only after you sell the mined coins. Before that they are “held as trading stock which can subsequently be realized through either a normal cash transaction…or a barter transaction” which means that it is taxed as income.
Know Your Tax Laws, Pay Your Taxes
We hope this cleared up the “how will regulation in South Africa work compared to other countries” question. The tax laws can sometimes (all the time) feel like murky waters, so if you need some extra assistance reach out to a local tax adviser who will be able to help you navigate those waters with ease.