Cryptocurrency, also known as crypto assets, has/have emerged as a disruptive force in the global financial landscape, challenging traditional monetary systems and redefining the way value is stored and transferred.
In South Africa, the rise of digital assets has sparked important legal and tax considerations, particularly regarding whether income derived from cryptocurrency transactions are of a revenue or capital nature.
This distinction not only impacts tax liabilities but also influences broader economic policies and the legal recognition of digital assets in South Africa’s financial system.
As regulatory frameworks evolve to keep pace with technological advancements, understanding how cryptocurrency is classified for tax purposes is crucial for investors, traders, and businesses alike.
This article aims to define cryptocurrency, distinguish between income of a revenue or capital nature, in the context of one’s gross income, and, finally, set out how cryptocurrency is treated in respect of each of the aforementioned scenarios.
WHAT IS CRYPTO CURRENCY
Some cryptocurrencies are created by their developers, while others are produced through the algorithms of their respective networks. They operate on a public ledger known as a blockchain, which tracks and records all crypto transactions.
The Blockchain is maintained through its international network of users allowing them to anonymously buy and sell cryptocurrency and to (where accepted), purchase and sell services and goods.
Cryptocurrencies, having no tangible form, are seen as digital assets which utilize encrypted networks to carry out, verify and record transactions. They are independent of a central government authority, such as a bank or government. Furthermore, transactions do not require submission to any authority nor approval from a central government authority or the use of a depository institution.
WHAT IS GROSS INCOME
Gross income usually means the total sum of all amounts, whether in cash or other forms, received by or accrued to the taxpayer during a tax year. The taxpayer doesn’t necessarily have to receive this amount. It is sufficient that the taxpayer be entitled to the amount, provided that there must be no conditions precedent for it to be due to the taxpayer.
Gross income includes earnings that are of a revenue nature. In this context, income of a revenue nature must be distinguished from income that is of a capital nature.
DISTINCTION BETWEEN INCOME OF A REVENUE NATURE AND INCOME OF A CAPITAL NATURE
An income’s revenue or capital nature is identified by looking at the type of asset through which the income is received. Where an asset is of revenue nature and is sold by the taxpayer, the income resulting from such a transaction will be of a revenue nature.
Capital assets produce income which is revenue in nature, such as a bakery and the machinery it uses to make bread.
The profit received by the bakery through selling bread is seen as income of a revenue nature, and this amount is included in one’s gross income. The capital assets in this example are the machinery and the bakery building itself which, if sold, will produce income of a capital nature.
Income of a revenue nature is taxed in terms of income tax, whereas income of a capital nature is taxed in terms capital gains tax. The differentiation between capital and income plays a vital role as capital income or gains are taxed at a lower effective rate.
WHEN ASSETS WILL BE CONSIDERED CAPITAL AND WHEN THEY WILL BE CONSIDERED REVENUE
When an asset is disposed of by a taxpayer, two possibilities arise.
The first possibility is where an asset is sold by a taxpayer in terms of a scheme of profit making.
A scheme of profit making can be defined as a project whereby an asset is acquired by a taxpayer who intends to resell it, at an opportune time, for a profit. The profit is seen as a productive turnover of capital represented by the asset.
In this scenario, the asset disposed of is seen as trading stock and proceeds of same are seen as being of a revenue nature.
The second possibility is where a taxpayer is merely realizing an asset that was held as an investment or in an unproductive form. The proceeds derived from such a sale would be seen as a receipt or accrual of a capital nature.
The taxpayer has the onus of proving that income or assets are not revenue in nature. Just because a transaction was profitable does not mean that the profit is revenue in nature. The taxpayer’s intention is significant in identifying whether income is revenue or capital in nature.
The intention of the taxpayer is determined by considering their stated intention coupled with the surrounding circumstances in each case.
CLASSIFYING CRYPTO CURRENCY AND WHAT SARS HAS TO SAY
In South Africa, under the Income Tax Act, crypto assets are defined as a financial instrument.
According to SARS, cryptocurrencies are subject to ordinary income tax rules, meaning money received or accrued to a person by way of a crypto asset will be generally treated as income of a revenue nature.
However, as stated in the preceding paragraph, whether the proceeds from the disposal of a crypto asset will be seen as being of a capital or revenue nature ultimately depends on whether the taxpayer was engaged in a scheme of profit making or was merely realizing an asset held in an unproductive form or as an investment.
Examples of varying intentions and their tax consequences are set out below:
1. X is a social worker, who reads an article about cryptocurrency and decides to purchase a crypto asset as an investment and/or to save money, holding it for 7 months. She then decides to sell it as she has to pay for an unforeseen surgery to her knee, after falling down her steps. In our view, the proceeds of such a sale would be of a capital nature as she was merely realizing an asset held in an unproductive form – this is the same regardless of whether she made a profit or the sale resulted in a loss.
2. Y is a trader who, in the ordinary course of business, purchases and sells crypto assets with the aim of making a profit. She purchases 100 crypto assets and resells them at an opportune time, for a profit of over 20%. In this scenario, we submit that the proceeds of such sale would be of a revenue nature, as she acquired the assets with the intention of entering into a scheme of profit-making, and the asset in question would be considered trading stock.
The golden rule in determining whether the sale of crypto assets, and all assets for that matter, will produce income of a revenue or capital nature will always involve looking at the taxpayers’ intention when he/she acquired the asset and when he/she disposed of such asset.
Article by Oliver Murray and Jason Clemens
Sources:
Legwaila et al Tax Law: An Introduction 20
Legwaila et al Tax Law: An Introduction 87
Montevirgen, K “What are cryptocurrencies and why is the world paying attention?” August 2024 website at https://www.britannica.com/money/what-is-cryptocurrency [Accessed 29th March 2025]
Van der Merwe, DP (ed) Roos, A Eiselen, GTS Nel, SS Erlank, W Mabeka, NQ Information and Communications Technology Law 3rd ed (2021) 240
Legwaila, T (ed) Oguttu, AW Muller, E Williams, RC Louw, C Surtees, P Tax Law: An Introduction 2nd ed (2019) 20; Income Tax Act 58 of 1962
Vumazonke, N & Parsons, S “An analysis of South Africa’s guidance on the income tax consequences of crypto assets” 2023 South African Journal of Economic and Management Sciences (26) 1-11 47 Vumazonke 2023 South African Journal of Economic and Management Sciences 1-11
Vumazonke 2023 South African Journal of Economic and Management Sciences 1-11
The above is intended for informational and educational purposes only. Please consult with a legal professional for further advice.
