On April 6, 2018, the South African Revenue Services (SARS) issued a clarification on the tax status of virtual currencies. SARS noted that it “will continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains as part of their taxable income.” Taxpayers must therefore declare all their cryptocurrency income and failure to do so could result in imposition of interest and penalties. It states that:
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 [capital gains tax] paradigm.
Determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence (of which there is no shortage).
The amount of tax accrued to a person could differ a great deal depending on whether gains in virtual currencies are taxed as income or capital gains.
II. Tax Treatment of Mining
The SARS Clarification noted that gains or loses concerning cryptocurrencies fall into three situations, each leading to a different tax treatment:
(i) A cryptocurrency can be acquired through so called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved 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.
On a Frequently Asked Questions page relating to cryptocurrencies, SARS answers the question of whether “an individual who ’mines’ cryptocurrency as a trade or business [is] subject to tax on the income derived from those activities?” The answer states that “[s]uch income is subject to normal tax. The person may be liable to register as a provisional taxpayer if the total taxable income received exceeds the tax threshold for the financial year.”
No laws, rules or guidance specifically addressing block rewards or reward tokens were located.
Prepared by Hanibal Goitom
Chief, FCIL I
 South Africa Revenue Service, supra note 1.
Last Updated: 02/05/2021