Reality bites bitcoin

Sars believes investors in currencies such as bitcoin and ethereum should be slapped with capital gains tax

The free lunch for cryptocurrency investors may soon be over, as local and international revenue authorities inch towards effective taxation models.

The SA Revenue Service (Sars) has told the Financial Mail that it plans to “clarify” the tax implications of buying and selling cryptocurrencies early this year, through either an interpretation or a practice note.

The revenue body believes cryptocurrencies should be subject to capital gains tax, though their decentralised nature could make this difficult to enforce. As such, the matter will require further consideration.

“It is an area that we need to explore further,” says Sars spokesman Sandile Memela, adding that the revenue service is in discussions with its global peers and will “continue to explore options”.

Lawmakers around the world are grappling with how to tax and regulate the burgeoning cryptocurrency market, which had a spectacular year in 2017.

Flagship virtual currency bitcoin soared more than 1,000%, which helped push the market capitalisation of all cryptocurrencies to more than Us$700bn.

Individual companies are also capitalising on the market euphoria. Imaging company Kodak said this month it has created a cryptocurrency for photographers, which facilitates payments when their pictures are used. As anything related to cryptocurrencies is hot property, the company’s share price quadrupled in less than two days.

At a time when many commentators are calling the virtual coin frenzy a speculative bubble, the SA Reserve Bank says regulations could be on the horizon.

The monetary authority is working with national treasury, the Financial

Services Board and the

Financial Intelligence Centre to “assess the appropriateness of regulatory frameworks”.

“It is quite possible that regulations may be issued in future, should it be deemed prudent,” a Bank spokesman says.

The regulators are reassessing their initial policy stance, which was published in a joint paper back in 2014. In it, they warned investors that the unregulated nature of the market makes it inherently risky, with “no legal protection or recourse” available if things go wrong.

Among their concerns are that transactions are irreversible, that investors can lose their digital coins to cyber-attacks, and that digital coins are handy instruments for the likes of money launderers.

So far, SA regulators have been far more accommodating than some of their peers.

In South Korea — one of the world’s biggest markets for digital currencies — the government is considering an outright ban on digital coin trading. News of the possible ban sent bitcoin’s price nearly 14% lower earlier this month.

But like many of its counterparts, the Reserve Bank is not ruling out the possibility of issuing a national digital currency.

Unlike bitcoin and other private virtual