Is there VAT on Cryptocurrency?
The use of cryptocurrencies has dramatically increased over the past decade. I don’t think a day goes by without anyone hearing the question: “Did you see the price of Bitcoin?”, or “What is your favourite cryptocurrency?”. However, this fast-evolving field proposes many uncertainties.
Cryptocurrency is not recognised as a legal currency in South Africa despite some businesses hinting towards the acceptance of these digital based currencies as a method of payment. The Intergovernmental Fintech Working Group (IFWP) published a Position Paper on Crypto Assets in June 2021 which reiterated that crypto assets are not “money” in the sense of a legal currency, although they perform some of the functions of money.
The challenges that arise due to the lack of universal acceptance of cryptocurrencies have resulted in unintended tax consequences for users. This article aims to examine the VAT treatment of Cryptocurrencies in South Africa.
What is Cryptocurrency?
Cryptocurrencies are revolutionary digital currencies used by people on a peer-to-peer network. They are predominantly used as a payment method in business transactions. It is a digital payment system that does not rely on banks to verify accounts which enables an individual to send and receive payments to and from another individual through a peer-to-peer system. Instead of physical money being used and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When one transfers cryptocurrency funds, the transactions are recorded in a public ledger called the blockchain.
When owning cryptocurrency, you do not own something tangible, but rather a digital asset on a de-centralized platform which can be moved between two users directly without the use of a third party such as a bank.
Cryptocurrencies and the Law:
To date SARS has not drawn a clear line in the sand with their stance on Crypto’s and VAT. However, it goes without saying that SARS will somehow want to regulate this field and one should be on the look-out for new legislation published in due course.
The advent of the Taxation Laws Amendment Act (TLAB) 23 of 2018 introduced changes to the Value-Added Tax 89 of 1991 (the VAT Act) in so far as cryptocurrencies are concerned. In terms of the VAT Act, cryptocurrencies are deemed to be financial services and therefore exempt from VAT (Section 2 of the VAT Act). The dealing of crypto assets therefore does not give rise to VAT. However, services related to such dealings may well give rise to VAT if the VAT registration threshold is met (Section 23 of the VAT Act).
From an income tax perspective, any disposal of crypto assets gives rise to income tax at the applicable rates. Individuals should declare any cryptocurrency dealings in their annual tax returns.
Definition of Goods and Services:
In terms of Section 1 of the VAT Act, goods are defined as corporeal movable things, fixed property, any real right in any such thing or fixed property, and electricity but exclude:
- Money
In terms of Section 1 of the VAT Act, services are defined as anything done or to be done, including the granting, assignment, cession or surrender of any right or the making available of any facility or advantage. The VAT Act specifically excludes the supply of money as a service.
Financial Services and Cryptocurrencies:
In terms of Section 2(1) of the VAT Act, the following activities shall be deemed to be financial services:
- the issue, allotment or transfer of ownership of an equity security or a participatory security;
(k) the buying or selling of any derivative or the granting of an option: Provided that where a supply of the underlying goods or services takes place, that supply shall be deemed to be a separate supply of goods or services at the open market value thereof, provided further that the open market value of those goods or services shall not be deemed to be consideration for a financial service as contemplated in this paragraph;
(o) the issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency.
The full definition of Financial Services is left for an exercise to the reader. The implication of this provision has the effect of rendering supplies of cryptocurrencies as VAT exempt in South Africa. A resident who supplies or sells any cryptocurrency may not charge any output VAT on that transaction. Similarly, a vendor cannot claim an input VAT deduction on any subsequent purchase of the cryptocurrency. The same applies to business transactions. A business that transfers cryptocurrencies to another business will not be required to account for VAT on that transaction. While the cross-border trade of cryptocurrencies is also currently not addressed in the VAT Act, it is submitted that these transactions are likewise exempt from VAT.
Mining Cryptocurrencies and VAT
Is it a service?
The process of creating cryptocurrency (also known as Bitcoin mining) is not specifically addressed in the VAT Act. If one considers that a person creates new Bitcoins during the mining process, then that person is rendering a service for VAT purposes. It would then be submitted that the definitions of services in the Act are sufficiently broad enough to include Bitcoin mining.
Is it a taxable supply?
Generally, a supply is taxable if VAT is charged at a rate of fifteen per cent on that transaction. Since the supply of cryptocurrencies is VAT exempt, then it follows that bitcoin mining is not a taxable supply. In the context of bitcoin mining, no person “consumes” the proceeds thereof. If there is indeed a consumer, identifying that consumer would be unrealistic. For this reason, bitcoin mining does not incur any VAT liability.
Cryptocurrencies as a payment method
The original design of cryptocurrencies is solely as an alternative payment method to traditional methods. It is possible that Bitcoin will be accepted as a valid payment system if merchants continue to accept it as form of payment for goods and services. In that case, whenever local merchants and vendors receive cryptocurrency as a form of payment for goods and services then that transaction should be treated as a taxable supply. For example:
XYZ is a resident e-commerce company selling goods and services on the Internet. XYZ regularly receives and accepts bitcoin payment from consumers in exchange of goods and services. XYZ converts the bitcoins into Rands. XYZ is a registered VAT vendor.
The implication of this transaction is that the VAT vendor in this scenario must account for VAT at 15% where cryptocurrency is accepted as a form of payment for good and services. The onus rests on the vendor to collect and remit VAT on those transactions to SARS. A taxable supply is made from the subsequent acceptance and conversion of the cryptocurrency into South African Rands. Therefore, a vendor must establish the relevant exchange rate to convert the cryptocurrency into South African Rands at the time payment is received or at the time the tax invoice is issued whichever time comes first (Section 9(1) of the VAT Act).
The fundamental question posed by cryptocurrencies in a business-to-customer VAT context is whether cryptocurrencies should be treated like money, or rather as goods or services. If it is treated in a similar manner to money, the overall outcome would simply be an individual going to purchase an item from a store and bearing the final burden of 15% VAT.
If, however, the cryptocurrency is treated as a good or service the position changes. In the example of XYZ above, the supply of goods and services over the internet in exchange for payment in cryptocurrency forms part of business enterprise activities and therefore should be treated as follows: Output VAT should be imposed on all goods and services and Input VAT claimed on all purchases making taxable supplies.
There are strong grounds to support an argument that cryptocurrencies should be treated similarly to money for VAT purposes to avoid this fundamental shift in the VAT administration system.
I leave the reader with the following legislative analysis by National treasury:
In its 2018 budget review, National Treasury indicated that it is considering amendments to the VAT Act to address cryptocurrencies. I conclude with a summary of this, and it appears to be the following:
VAT is imposed on the supply of goods or services by VAT vendors. Registration as a VAT vendor is linked to whether a person carries on an enterprise where it supplies goods or services.
The definition of goods and services exclude the supply of money. Money is defined as coins or paper currency issued by the SARB. Therefore, cryptocurrencies that are not issued by government or a specific counterparty are unlikely to meet the definition of money.
Lastly, the supply of the cryptocurrency as a service could still fall outside the VAT system if its supply is exempt. The supply of financial services is exempt from VAT. It was held in foreign case law that a bitcoin, one of the main cryptocurrencies in circulation, is not an equity or debt security, which are two of the categories of financial services listed in the VAT Act. The supply of currency also constitutes a financial service. Currency is defined as any banknote or other currency of any country, except when used as a collector’s piece, investment article, item of numismatic interest, or otherwise than as a medium of exchange. Unless the cryptocurrency is a currency of another country, it will not meet the definition of currency for VAT purposes.
The brief analysis above leaves one in a position where the transfer of a cryptocurrency in exchange for a taxable service which is not a financial service should therefore be considered and accounted for VAT purposes.
In a media statement issued on 6 April 2018, SARS indicated that pending policy certainty it will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies. Businesses and customers that utilise cryptocurrencies in their dealings should keep a keen eye on developments in this regard as the effect could be significant, as illustrated in this article.
Article written by Ivan Benn
