In the draft Taxation Laws Amendment Bill 2018, Treasury proposes to include the “issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency” under the ambit of exempt financial services in section 2 of the VAT Act.

If the proposal is accepted, then, to the extent that the other party to the transaction is a resident, these transactions will be exempt from VAT in terms of section 12(a) of the VAT Act. Therefore, there will be no output VAT being levied on the supply of cryptocurrency and no input VAT claims on the acquisition of cryptocurrency.

However, the exemption provided for in section 12(a) of the VAT Act excludes financial services which would be charged with VAT at the rate of zero percent under section 11 of the VAT Act. Therefore, to the extent that the other party to the transaction is a non-resident, then these transactions may be subject to VAT at the rate of zero percent.in terms of section 11(2)(l) of the VAT Act. In such cases the cryptocurrency trader may be required to register for VAT and would be able to deduct input VAT incurred in relation to the cryptocurrency transactions.

In response to public comments:

Section 2(1) of the VAT Act currently contains a proviso that excludes fees, commissions, merchant’s discounts or similar charges from exempt financial services in section 2. SARS has advised that an amendment will be made to this proviso to add a reference to such charges on cryptocurrencies. Therefore, the fees that may be charged by third parties, for example debt collectors, may be taxable.

Treasury and SARS have also advised that if a vendor making 100 percent taxable supplies opts to accept cryptocurrency as payment and then needs to sell them later on (to a resident), then such vendor must accept the fact that the nature of its business has fundamentally changed from one making only taxable supplies to one making mixed supplies and the usual provisions of the VAT Act relating to mixed supplies and apportionment will apply. On the invoice for the taxable supplies, the vendor will account for the value of the taxable supplies in the equivalent rand value (inclusive of VAT). When cryptocurrency is received as payment for the taxable supplies and the cryptocurrency is then onsold, such supply of cryptocurrency will be a non-taxable supply. Unless the value of the vendor’s taxable supplies exceeds 95 percent of total supplies (section 17(1)(i) of the VAT Act), input VAT incurred in respect of expenses relating to both the taxable and non-taxable supplies (such as overhead expenses) must be apportioned and can only be claimed to the extent it relates to the taxable supplies.

The clarification of the tax treatment of cryptocurrencies and their application in terms of VAT law is beneficial to vendors and therefore a step in the right direction.