Crypto assets: Current and future tax and exchange control considerations

Crypto assets are a young and boisterous part of the current financial landscape. Recent developments point to crypto assets becoming an entrenched, although still volatile, part of the global financial system. A prime example is El Salvador, which on 7 September 2021 became the first country to allow the use of a cryptocurrency as legal tender. In the same week, the US Treasury held engagements with industry representatives to gain insight into the regulatory requirements for a crypto asset known as “stablecoins”.


In South Africa the regulation of crypto assets is the terrain of several role players. The South African Reserve Bank (SARB), as the overarching regulator of the South African financial system and transactions in currency, is the lead regulatory entity. The South African Revenue Service (SARS) is brought into the regulatory matrix, because crypto assets represent economic value being traded in, received by taxpayers and disposed of by investors – triggering the Commissioner’s taxing authority and taxpayers’ obligation on any income or capital events related to crypto assets.  


While the regulation of crypto assets is a nascent part of South African regulatory landscape, the various role players have put in place some concrete requirements within the current legislative framework. These stakeholders have also joined together in the Intergovernmental Fintech Working Group – Crypto Assets Working Group (IFWG) to formulate a collective policy position on crypto assets and the financial service providers facilitating the crypto asset market. The IFWG released a position paper on 21 June 2021 setting out its recommendations on policy positions and regulatory measures for the crypto asset market. 


This alert briefly covers some of the tax and exchange control compliance requirements where South African tax residents invest in or trade crypto assets. It then notes some of the policy proposals made by the IFWG for the regulation of crypto assets.


Tax and crypto assets


SARS’ position has historically been that normal income tax and capital gains tax principles apply to crypto assets. In a media statement in 2018, SARS stated that it would “continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income”.


In our alert on 6 August 2020, we noted that the 2020 Taxation Laws Amendment Bill proposed replacing references in the Income Tax Act 58 of 1962 (ITA) to “cryptocurrency”, with “crypto asset”. This implies that the position SARS has taken regarding cryptocurrencies will be applied to crypto assets more generally. These amendments came into force on 1 March 2021.

Therefore, where a taxpayer is engaged in a trade related to crypto assets the receipt or accrual of such crypto assets by the taxpayer could constitute gross income for that taxpayer. Similarly, where a crypto asset is held as a capital investment, the capital gain or loss on the disposal of that crypto asset would have to be accounted for by a taxpayer under the prescripts of Eighth Schedule to the ITA. 


Exchange control and crypto assets


The SARB’s historical position has been that crypto assets do not constitute currency or capital under the Exchange Regulations, 1961 (Excon Regulations). However, individuals can make use of their single discretionary allowance of R1 million, or their individual foreign capital allowance of up to R10 million, to purchase crypto assets using foreign currency.


South African exchange control residents are not permitted to elect to receive outstanding foreign payments in the form of a crypto asset, as the transaction is currently not reportable on the FInSurv Reporting System. Furthermore, a non-resident crypto asset service provider (CASP) who introduces crypto assets into the South African market and receives payment in Rand, is  not able to transfer the sale proceeds abroad. This is in line with section G.(C)(i) of the Currency and Exchanges Manual for Authorised Dealers.


Proposals by the IFWG 


The nature of crypto assets, including the maturing of the market, and its misalignment with aspects of South Africa’s applicable regulatory framework, have led to a set of policy proposals by the IFWG for the regulation of crypto assets and CASPs.


While no explicit tax proposals have been made, tax evasion and revenue collection risks were identified given the anonymous and non-institutionalised nature of crypto assets. The IFWG has proposed several interventions aimed at ensuring that CASPs are subject to licencing and reporting requirements that would ensure the necessary information is provided to regulatory institutions. These proposals include the following:


  • Inclusion of CASPs as an accountable institution in Schedule 1 of the Financial Intelligence Centre Act.
  • Declaration of crypto assets as a “financial product" by the Financial Sector Conduct Authority for the purposes of the Financial Advisory and Intermediary Services Act 37 of 2002. 

These proposals would ensure that know-your-client and other important information regarding the taxpayers involved in crypto asset transactions, including the source of their funds and the scale of their transacting, is captured by regulatory institutions and available to SARS to pursue any non-compliance with tax legislation.


The IFWG has made several proposals on the exchange control regulation of crypto assets by the SARB. These proposals seek to enable increased formal regulation of the marketing of crypto assets, and cashflows which facilitate crypto asset trading and investments. The proposals by the IFWG in this regard focus on amendments to the Excon Regulations and include:


  • Empowering the Financial Surveillance Department of the SARB to assume the supervisory and regulatory responsibility for the monitoring of cross-border financial flows in respect of crypto asset services.
  • Amending Excon Regulation 10(4) to include crypto assets in the definition of “capital" for the purposes of Excon Regulation 10(1)(c).
  • Explicitly permitting individuals in the Excon Regulations to purchase crypto assets using their single discretionary allowance or foreign capital allowance.
  • Expanding the authorised dealer with limited authority regime to include crypto asset trading platforms (CATPs) to facilitate cross-border crypto transactions and trading in crypto assets in South African rand.
  • Introduction of requirements for CATPs to report crypto transactions to the SARB.
  • Amending the Excon Regulations to allow licenced CATPs to source or buy crypto assets offshore for the purpose of selling to the local market.

The proposals by the IFWG would assist in filling the regulatory vacuum that currently prevails over the crypto asset market. Recognising that ordinary tax principles are largely sufficient to capture the exchange or receipt of value in the form of crypto assets, the IFWG has made proposals which aim to limit the possibility for tax evasion by introducing reporting requirements for CASPs and CATPs.


The more significant proposals relate to the exchange control environment. Here, the IFWG has proposed moving towards a formal regulation of the crypto asset market which has been absent to date. This formal regulation would ensure that relevant stakeholders have an express regulatory mandate regarding the crypto asset market and provide the crypto market with the ability to operate in a compliant manner, which will lead to better protection for consumers and greater certainty for market participants.





Read the original publication at Cliffe Dekker Hofmeyr

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