Bitcoin: Is it a currency or another type of asset? The
answer to this question has significant implications
for how Bitcoin owners and traders are taxed. As
at the time of writing, one Bitcoin was trading at
around R124 850, having been trading at R13 837
on 1 January 2017. Bitcoin raises a number of interesting
questions, such as what drives the volatile swings in price and
is Bitcoin really the way of the future?
There is no escaping the rise in popularity of Bitcoin. The
International Monetary Fund and the European Central Bank,
among many others, have authored reports noting that serious
consideration should be given to Bitcoin and blockchain
technology because of its growing international appeal. The wide
reach of Bitcoin is assisted by the fact that it is entirely digital and
has no physical form.
Bitcoins are accepted as a means of payment across the
world by many reputable entities, such as Microsoft, Overstock
and TakeaLot. Pick n Pay recently successfully piloted the
acceptance of payments in Bitcoins.
However, there have also been instances of illegal activity using
Bitcoins. For example, a website on the so-called Dark Web,
known as Silk Road and Silk Road 2.0, accepted Bitcoins as
payments for, inter alia, purchasing drugs and commissioning
hits on individuals.
One of the key features of Bitcoin is that it is not controlled by a
single entity, such as a central bank. This lack of central control
allows Bitcoin to circumvent exchange control regulations. So,
transfers can be made internationally without going through a
central bank or a remittance company.
It also appears as though traditional macroeconomic variables,
such as inflation and interest rates, do not have a direct impact
Additionally, Bitcoin is limited to a total supply of 21 million,
thereby avoiding issues that could be caused by a central
bank manipulating the money supply (e.g., through quantitative
The absence of a single authority to regulate the use of Bitcoin
would have led to fraud issues (most commonly double spending)
around the use of Bitcoin. But, this problem was
solved quite elegantly by Bitcoin’s unknown designer(s) who
used the alias Satoshi Nakamoto in the White Paper entitled
Bitcoin: A Peer-to-Peer Electronic Cash System.
All transactions on Bitcoin are, thus, simultaneously stored on
a distributed public ledger that cannot be altered. This ledger
is known as the blockchain and has found application beyond
Bitcoin itself. As all transactions are publicly recorded, if a person
were to try and process a fraudulent transaction, the network
would reject it as it would not reconcile.
Anonymity and security
Yet, what is stored on the network is merely addresses and
Bitcoin values, not personal information. When you have
Bitcoins, you will have a wallet address and this is what is
recorded. This is akin to a bank account. What is also key here
is that this may indicate that Bitcoin is an anonymous vehicle for
transacting. This is, however, not the case. Studies by forensic
IT specialists have shown that a user can be determined with
significant investigation; hence, Bitcoin is pseudonymous. This
aspect of Bitcoin has led to concerns around Bitcoin being used
for money laundering and the financing of terrorism.
Bitcoin itself and the addresses it uses, mentioned above, are
governed and secured by a branch of mathematics known as
cryptography. Cryptography is the process and art of converting
legible information into a code which can only be read legibly
by the trusted party to the transaction. This has led to the
term “cryptocurrency”, of which Bitcoin is one of many. Other
examples include Ethereum (currently the largest cryptocurrency
by market capitalisation after Bitcoin), Litecoin, Peercoin and the
tongue-in-cheek Dogecoin. Note that this is not an exhaustive list
and the world of cryptocurrency is exceptionally vast.
Bitcoins can be acquired in various ways: Through peer-to-peer
purchases, by being purchased on an exchange or through
In the first instance, individuals can transact with others to
purchase Bitcoins or trade them for goods and services.
Exchanges can be used in the second instance. An exchange
works, as other exchanges, where conventional currency is
used to purchase cryptocurrency. South African exchanges
include Luno and Ice3X. It is worth noting that across exchanges
globally, Bitcoin trades at different prices, indicating a lack of
The last method of acquisition involves using computing power
to solve cryptographic hash functions, thereby generating
a reward of 12.5 Bitcoins, which halves with every 210 000
blocks generated, and is known as “mining”. This method uses
tremendous amounts of electricity and has been commercialised
globally, effectively excluding small players who have limited
The regulatory environment and tax
The aforementioned characteristics and uses collectively present
interesting challenges to regulators and governments alike. At the
moment, in South Africa, there is no regulatory framework. This
is what the deputy CEO of Pick n Pay mentioned as the obstacle
to a full-store rollout of Bitcoin acceptance. Even globally, the
regulatory situation is still uncertain with very few countries
providing a comprehensive regulatory framework.
There are also challenges within the financial reporting space, as
there is no definitive policy for accounting for Bitcoin. However,
initial research by the author in this regard does exist.
Our focus here is on how tax regulators should be taxing Bitcoin,
if at all. South Africa currently does not have any guidance on
how Bitcoin should be taxed. The SARB has stated, in their
Position Paper on Virtual Currencies, that they do not “oversee,
supervise or regulate” virtual currencies, including Bitcoin.
BITCOIN PERSPECTIVES FROM VARIOUS COUNTRIES
Country Tax Treatment
USA The Internal Revenue Service has no single
treatment for Bitcoin taxable gains and losses.
What is crucial is the character of the gain or loss.
Where Bitcoins are held as a capital asset, the gain
or loss is capital in nature. But, if Bitcoins are not
held as a capital asset (i.e., income in nature), the
gain or loss will be an ordinary gain or loss.
UK Her Majesty's Revenue and Customs requires that
Bitcoin be taxed based on whether the receipt or
expenditure is revenue or capital in nature as well
as on the type of taxpayer to determine whether
income tax, capital gains tax or corporation tax is
Australia Australia treats Bitcoin transactions as akin to
barter arrangements, and Bitcoin is treated as an
asset for capital gains tax purposes.
Japan Japan has taken steps to characterise Bitcoin
as legal tender which could lead to Bitcoin being
taxed as a currency.
In contrast to the South African position, some guidance has
been issued by other countries. The table above provides a brief
summary of these positions. (Note that this is not an exhaustive
Given these differing views, it is clear that there is no consensus
on how Bitcoin should be taxed. This presents challenges for
practitioners with regard to declaring Bitcoin gains and for
determining the tax implications thereof.
As the regulatory environment moves to keep pace with the
development and adoption of Bitcoin and other cryptocurrencies,
it is prudent to highlight that exchanges are slowly becoming
the nexus of regulation. As a result, information around Bitcoin
transactions could then be accessed by SARS, placing emphasis
on ethics and the principle of self-reporting in this regard.
In South Africa, Bitcoin will not be money as defined in section 1 of
the VAT Act. Consequently, it may be subject to VAT if supplied
as a good. In addition, Bitcoin may be treated as an asset and
whether it is taxed under capital gains tax or not is based on the
intention of the acquirer.
Additional dimensions that need to be explored include the
- How Bitcoins that are mined should be treated.
- Whether fair value gains in Bitcoin should be taxed.
- The translation rules that apply if Bitcoin is valued in a
- The tax treatment of foreign exchange gains or losses on
It is clear that, for the moment at least, the evolution of
cryptocurrencies is outpacing regulations. As a result,
practitioners should be prudent when accounting for the tax
effects of cryptocurrencies.