South Africa is preparing a new tax and financial regulation for digital assets. Joon Chong, a partner at South Africa-based law firm Webber Wentzel, has shared that these new laws could pose monumental tax reporting challenges to digital asset investors.
In an opinion piece, she wrote for leading South African business and financial news outlet Fin24, Chong noted that the difficulty would emanate from explaining the legal definition the country is giving to the asset class.
The South African Revenue Service (SARS) defines digital assets as all items that are stored on a distributed ledger on decentralized networks, including currency and non-currency assets such as NFTs, security, and utility tokens. This definition places them under the Income Tax Act 58 of 1962 (ITA), which will cause their disposal to be taxed using “usual income tax rules for financial instruments such as equity shares or unit trusts.”
These rules categorize assets as either capital assets or revenue-generating assets. This raises the question of what category any disposal of a digital asset belongs to and which will be a taxable event. However, digital asset investors will have a tough time proving that their gains or losses during disposal are capital in nature as digital assets are highly risky and volatile.
“The intention of the taxpayer is key in determining whether gains or losses from the disposal of crypto assets are capital or revenue in nature. However, taxpayers face an uphill battle to prove that their gains or losses are capital in nature due to the high risk and volatile nature of this asset class,” she said.
Chong added that South Africans should prepare for the new regime as the South African Reserve Bank (SARB) has stipulated a 12-18 months timeline for when its new digital assets AML/CFT and taxation framework will be ready.
South Africa’s struggles with illicit actors in the digital asset market
South Africa’s decision to regulate digital assets has been largely prompted by the spate of high-profile digital asset scams recorded in the country. Market moving fraud cases originating from the country include the $3.8 billion Africrypt scam.
Along with the proposed regulations, South Africa is also banking on introducing a central bank digital currency (CBDC) to encourage the safe adoption of digital currencies. The SARB has completed several rounds of testing of the CBDC, including an inter-bank operability test.
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