This article is based on tax law for the year ending 28 February 2021.
Taxation of income on the cryptocurrency that was mined: It is stated that it will be taxed when income is received/accrued Therefore, mining would be classified as a trade.
It is also mentioned that the sale of cryptocurrency would be classified as per the intention. Would this mean that when you mine cryptocurrency, you are taxed when you have successfully mined the cryptocurrency and you will be taxed on it when you sell it?
Additional to this, if you mine cryptocurrency as an investment will the accrual of cryptocurrency be taxed as a gross income and when you sell it will capital gains tax apply? When will cryptocurrency sales be seen as local sales and when as foreign sales?
We start with the ‘intention’ part first. Cryptocurrency is an asset, a financial instrument – see paragraph (f) of the definition of “financial instrument” in section 1(1) of the Income Tax Act. The essential question here is whether or not the receipt (accrual) from the disposal of the cryptocurrency is of a capital nature. If the taxpayer were to argue that the receipt on disposal is capital in nature, the taxpayer bears the burden to prove on a balance of probabilities that the proceeds were capital in nature (what the taxpayer’s intention was).
Our courts have dealt with this issue on many occasions – the most recent being 9 February 2016. Judge van Der Merwe confirmed in this SCA case (CSARS v Capstone 556 (Pty) Ltd) that “… our courts have … consistently applied the test that a gain made by an operation of a business in carrying out a scheme of profit-making, is income and vice versa.” With ‘income’ the judge of course refers to ‘gross income’.
The Judge continued as follows:
“Where a profit is the result of the sale of an asset, the intention with which the taxpayer had acquired and held the asset is of great importance and may be decisive. In essence, the question is whether the asset was acquired for the purpose of reselling it at a profit and assumed the character of trading stock …”
When the client is generating (referred to as mining the currency) a 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, the person is probably carrying on a trade and it would be gross income when sold (or trading stock).
We don’t agree with the following statement: “If you sell the cryptocurrency, after you have held it for 3 years or longer (investment intention) that it will be taxed as capital gains.” You may have section 9C of the Act in mind here, but it doesn’t apply. The block chain itself may be a capital asset.
The source of the activities, RSA or not, is only relevant if the individual is not a tax resident of the RSA there is an assessed loss resulting from these activities (see section 20(1), and then also section 20A(2)(b)(ix)). It is a factual determination, but we would agree that it may be where the person carries on the mining activities, or where the person has a permanent establishment.
Refer to webinar commentary on Capital Gains Tax Series - Individuals Tax here.