A cryptocurrency (typified by Bitcoin) is defined as a virtual crypto-currency that exists solely in electronic form. There is currently no legislation regulating virtual currencies in South Africa, accordingly, no legal protection or recourse is afforded to users of cryptocurrencies.

The Income Tax Act (the Act) does not define “currency”, as such, cryptocurrencies are not regarded by SARS as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, cryptocurrencies are regarded by SARS as assets of an intangible nature. This means cryptocurrencies are not regarded as South African tender. Cryptocurrencies have only recently started being accepted in South Africa as a medium of payment or exchange.

Whilst not constituting cash, cryptocurrencies can be valued to ascertain an amount received or accrued as envisaged in the definition of “gross income” in the Act. Following normal income tax rules, income received or accrued from cryptocurrency transactions can be taxed on revenue account under “gross income”.

Alternatively, such gains may be regarded as capital in nature, as spelt out in the Eighth Schedule to the Act for taxation under the CGT paradigm.

Gains from cryptocurrency-related investments and holding ‘may be regarded as capital in nature’ in certain scenarios while taxpayers are also entitled to claim expenses and deductions from cryptocurrency accruals or receipts SARS expects affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income.

Gains or losses in relation to cryptocurrencies can broadly be categorised with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences:

(i) A cryptocurrency can be acquired through so called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, through the solving of complex computer algorithms. By verifying these transactions the “miner” is rewarded with ownership of new coins which become part of the networked ledger.

This gives rise to an immediate accrual or receipt on successful mining of the cryptocurrency. This means that until the newly acquired cryptocurrency is sold or exchanged for cash, it is held as trading stock which can subsequently be realized through either a normal cash transaction (as described in (ii) or a barter transaction as described in (iii) below.

(ii) Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, which are essentially markets for cryptocurrencies, or through private transactions.

(iii) Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply.The simple answer is that profits made on the buying and selling of Bitcoin fall within normal tax rules. This means there is nothing different about cryptocurrencies and there’s nothing special about taxing profits made on cryptocurrencies. One ought to understand that Bitcoin is not money, it is a commodity closer to gold than it is to rand.