A critical analysis of the capital gains tax implications on the disposal of cryptocurrencies: an evaluation of possible lessons for South Africa from Hong Kong

Abstract

Cryptocurrencies are internet-based digital currencies or digital representations of value that are not issued by a central bank. They are traded, transferred, and stored electronically, whether by natural or juristic persons, as a means for payment, investment, and other forms of utility, and it exists wholly in the virtual realm. In the South African context, cryptocurrencies are, presently, treated as neither official South African tender, nor are they, as yet widely used as a medium of payment or exchange. Similarly, the South African Revenue Service (SARS) does not yet consider cryptocurrencies as ‘currency’ for income tax and Capital Gains Tax (CGT) purposes. Instead, SARS regards cryptocurrencies as valuable property of an intangible nature. Conversely, the Hong Kong Inland Revenue Department does recognize cryptocurrencies and classify them into three categories, being payment tokens, security tokens, and utility tokens. Payment tokens are used as payment for goods and services. Security tokens provide the owner with interests in a business, such as debt or rights to a share in the profits in that business. Utility tokens give access to specialized products and services, which the company is working on, and thus, the taxation of cryptocurrencies in Hong Kong depends on the type and use of each token. This study shows that, while SARS levies tax on cryptocurrency using the legislative framework provided by the Income Tax Act 58 of 1962 (ITA), in Hong Kong, Capital Gains Tax are not levied on the disposal of any cryptocurrency. The study examines the legal position in South Africa and Hong Kong as to the treatment of cryptocurrencies for purposes of taxation with a view to hypothesizing that SARS ought to adopt an approach akin to that followed by the Hong Kong Tax Authority. The study provides concrete recommendations for the development and enhancement of tax policy in South Africa so far as it concerns cryptocurrency treatment.