Treasury has proposed amendments to the Income Tax Act, which aim to define how cryptocurrencies are taxed.
The changes are proposed in the draft Taxation Laws Amendment Bill (TLAB), which proposes to include cryptocurrencies in three areas – the definition of financial instruments of the Income Tax Act, the definition of financial services in the VAT Act, and the ring-fencing of assessed loss provisions of the Income Tax Act.
According to Mazars senior tax consultant Tertius Troost, the inclusion of cryptocurrencies will help clarify how digital tokens will be treated with regards to VAT.
“The clarification of the VAT treatment will be well received, especially on the basis that the issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency will be included under the definition of financial services in terms of section 2 of the VAT Act,” said Troost.
“If accepted, all dealings in cryptocurrencies will be exempt from VAT.”
“This means there will be no VAT input claims on the acquisition of cryptocurrencies, and no VAT output being levied on the disposal of cryptocurrencies.”
Additionally, the VAT on costs involved in the mining or purchase of cryptocurrencies may not be claimed as VAT input, with cryptocurrencies being treated similarly to shares for VAT purposes.
“However, the good news seems to end there,” said Troost.
“Treasury has proposed to include the acquisition or disposal of any cryptocurrency under the ring-fencing of assessed loss provisions (colloquially referred to as suspect trades).”
“This will result in cryptocurrency dealers not being able to offset the losses incurred from the dealing in cryptocurrencies from any other trade.”
“In other words, these losses are ring-fenced to be used only against future profits earned from cryptocurrencies.”
However, this proposal will not affect users who hold cryptocurrencies as capital assets, and they will still be able to offset any losses against capital gains.
Troost said this clarification is a step in the right direction as cryptocurrencies become more prevalent in the daily lives of South Africans.