A critical evaluation of the classification of cryptocurrency transactions as an asset in the South African context

Abstract

Background The emergence of cryptocurrency is one of the significant innovations of the Fourth Industrial Revolution. Cryptocurrency is an interesting phenomenon as it was created to be an independent, peer-to-peer payment system operating as an alternative to the traditional fiat currency system. Currently, cryptocurrency is mainly used on a speculative basis as it does not have legal tender status in most countries around the world. Cryptocurrency’s popularity has grown at a tremendous rate over the recent years while limited guidance has been issued to date regarding the taxation of cryptocurrency transactions both locally and globally. The Organisation for Economic Co-operation and Development has acknowledged that policymakers should attend to regulating cryptocurrency as a matter of importance. In South Africa, cryptocurrency has been included in the financial instrument definition and classified as an asset.

Main purpose of study The aim of the study was to understand the appropriateness of the current tax classification of cryptocurrency transactions in South Africa and to identify possible alternative classifications for cryptocurrency transactions from the view of tax specialists. Method An open-ended questionnaire together with a thematic analysis were used as primary data to evaluate the appropriateness of the current tax classification in South Africa. In addition, secondary data was used to determine whether the current tax treatment in South Africa is aligned with other jurisdictions and to make recommendations, if needed.

Results The majority of participants to the open-ended questionnaire noted that the current classification of cryptocurrency as assets in South Africa is appropriate. A few participants indicated that additional guidance is required to clarify the application of the existing tax principles to the taxation of cryptocurrency transactions. Other participants acknowledged that the different types of cryptocurrency and the different stages in its life cycle drive the tax treatment.

Conclusions The classification of cryptocurrency as an asset is in line with other jurisdictions and as such is deemed appropriate. Attention needs to be given to the different stages in the life cycle of cryptocurrency as the asset has different characteristics in the various stages and as such could require different tax treatment and tax principles. In addition, taxpayers’ intention with their cryptocurrency holdings are of the utmost importance to ensure the classification as an asset as opposed to trading stock is appropriate.