The inclusion of virtual currencies in the calculation of income tax

Abstract

This study is aimed at the application of South African legislation to virtual currencies, such as Bitcoin. Due to the increased popularity of virtual currencies, its future taxation could be determined in the light of existing law. This mini-dissertation studied the nature and characteristics of virtual currencies as well as its advantages and disadvantages in order to determine what problems states are facing concerning the regulation of it. More specifically, this study identified the main characteristics that contribute towards the struggle to legislate virtual currencies in general. Despite attempts by countries such as China and Japan to treat virtual currencies as legal tender, to date, they are not accepted as legal tender under the South African banking law. However, this does not mean that virtual currencies cannot be deemed to be money or a valid method of payment in South Africa. In 2014, the South African National Treasury stated that the merchant who accepts virtual currencies, does so at own risk. However, the National Treasury did not expound on the income tax consequences in these circumstances. Therefore, this study applied the elements of "gross income" under the Income Tax Act 52 of 1968 and the supplementary case law, to various virtual currency transactions. The purpose was to determine whether virtual currencies could be included in a taxpayer's gross income. The study of the elements above and the application thereof to virtual currencies led to a positive conclusion: virtual currencies can be included in a taxpayer’s "gross income". In light of the possible inclusion of virtual currencies, it should be kept in mind that the mere inference of inclusion is not sufficient. As a result, tax administration laws were reviewed to determine whether the inclusion of virtual currencies can be ensured and to decide on the consequences of non-compliance. Alternative legislation, such as legislation from the banking and financial sector, within the South African as well as the United States context were also revised in order to contribute to ensuring the inclusion of virtual currencies. Despite the study of alternative legislation, this study mainly approached virtual currencies from a tax law perspective. This study closed with suggested solutions to the problems identified above and throughout the study.