Crypto assets as a financial service for VAT: An analysis

Abstract

‘Crypto assets’ is an umbrella term referring to digital financial assets (such as Bitcoin) founded on distributed ledger technology. The South African Revenue Service (SARS) defines crypto assets as a digital representation of value that are not issued by a central bank; thus, these assets are traded, transferred and stored electronically by individuals and entities – both natural and legal – for purposes such as payment, investment and various forms of utility (Ukwueze, 2021). The underlying technology behind crypto assets incorporates cryptography techniques (SARS, 2023). Since their inception in 2009, crypto assets have drawn increasing attention from regulators (OECD, 2020), and cryptocurrency has emerged as a novel form of payment in recent years. This development is fuelled by the flaws in the presently dominant payment method of fiat currency, which include the centralised structure of fiat currency, high transaction costs, the time it takes to process payments (especially for foreign transactions) and the need for more confidence in the institutions managing the current monetary systems (Hamukuaya, 2021). This report analyses whether a crypto asset can be classified as a financial service according to the South African Value-Added Tax Act, No. 89 of 1991 (VAT Act) legislation through an assessment of the features of crypto assets (also known as cryptocurrencies) and a comparison of the classification of crypto assets by South Africa to that by other countries. According to the study's findings, South Africa has adopted the strictest approach, excluding "the issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency" by categorising cryptocurrency as financial services under Section 2 of the VAT Act. The analysis also reveals that South Africa's approach to classifying cryptocurrency for VAT purposes is similar to that of other countries. Therefore, this research suggests that South Africa should broaden the investigation into categories such as the source of cryptocurrencies, nature of supply and place of supply transactions that include exchanging cryptocurrency assets for fiat money or other assets, as well as utility tokens when they are used. These suggestions might serve as further evidence that consensus about the VAT consequences of transactions involving cryptocurrency assets is still pending.