By Chetan Vanmali, a Partner and Kagiso Nonyane, an Associate at Webber Wentzel

In South Africa, as with most other countries around the world, there is no guidance and regulation regarding cryptocurrencies such as Bitcoin. The Budget Review 2018 (Budget) proposes that the income tax and value-added tax (VAT) legislation be amended to deal with cryptocurrencies, which pose a risk to the South African tax system. Given the current Budget deficit, the imposition of taxes on cryptocurrencies would assist the South African Revenue Service (SARS) with increasing its revenue collection going forward.

Given the uncertainty as to the nature of cryptocurrency, it is imperative that National Treasury and SARS issue clear and concise rules regarding the tax treatment of cryptocurrencies in South Africa.

From a VAT perspective, it is important to determine whether cryptocurrencies would be considered as the supply of money (and therefore fall outside the VAT net), or whether it could be considered to constitute the supply of goods or services that are subject to VAT.

"Money", as defined in the VAT Act, includes South African coins and any paper currency that is legal tender under the South African Reserve Bank Act 90 of 1989. In this regard, the South African Reserve Bank (SARB) has already stated that cryptocurrencies do not have legal-tender status. Consequently, cryptocurrencies do not constitute "money" for VAT purposes.

The next question is whether trading in cryptocurrencies can be regarded as the supply of goods for VAT purposes? "Goods" are defined in the VAT Act as corporeal movable things, fixed property and any real right in any such thing or fixed property. Given that cryptocurrencies are incorporeal, they would not constitute "goods". However, it is apparent that they do constitute "services", as defined, in that they can be said to constitute a right, facility or advantage as contemplated in the definition of "services". To the extent that the trade (supply) in cryptocurrencies is considered to be a supply of services, it would most certainly trigger VAT consequences if it is bought or sold in the carrying on of an enterprise.

Authorities in other jurisdictions around the world, such as Germany, do not regard cryptocurrencies as "e-money" within the meaning of the Payment Services Oversight Act (Zahlungsdiensteaufsichtsgesetz, ZAG) and the European Union Electronic Money Directive and are of the view that it should be classified as a financial instrument.

The United Kingdom has classified cryptocurrencies as "taxable vouchers" and therefore VAT would have to be levied on the sale thereof. The Chinese Central Bank on the other hand has completely prohibited banks and payment processers from being involved with cryptocurrency- related transactions and the Russian Central Bank has indicated that virtual currency is illegal in terms of Article 27 of the Federal Law.

Canada appears to be the leading jurisdiction when it comes to regulating cryptocurrencies. It has two separate rules and the application thereof depends on whether cryptocurrency is used to buy goods or services or whether it is merely bought and sold for speculative purposes. In circumstances where cryptocurrency is purchased for speculative purposes, it is taxed just like any other investment.

National Treasury has not yet revealed which route it will be taking regarding the taxation of cryptocurrencies in South Africa. However, they are likely to adopt an approach that would allow them to collect additional revenue and contribute to reducing the budget deficit.