A comparative study of VAT on cryptocurrencies

Abstract

The research landscape pertaining to cryptocurrencies has witnessed extensive exploration across various disciplines, including information technology, legality, accounting, and taxation. However, a noticeable shortage of comprehensive investigations exists regarding the challenges faced by tax regimes and jurisdictions in taxing cryptocurrencies. This study aims to bridge this gap by conducting a meticulous analysis of the characteristics of Bitcoin and the tax implications of cryptocurrencies in South Africa and other jurisdictions. Special attention will be devoted to scrutinizing the ramifications of Value-Added Tax (VAT) on cryptocurrency transactions. Notably, existing literature sheds light on the challenges encountered by the South African Revenue Service (SARS) in revenue collection from cryptocurrency transactions. The necessity for SARS and the Treasury to refine prevailing legislation emerges as a critical consideration to curtail tax evasion in cryptocurrency transactions and ensure the effective collection of tax revenue. Cryptocurrencies, as virtual currencies existing outside central bank control, have triggered varied responses from different jurisdictions. While some tax jurisdictions permit the use of cryptocurrencies, others outrightly prohibit them. In the South African context, the use of cryptocurrencies is not prohibited, and SARS has implemented VAT legislation specific to cryptocurrencies. Designating cryptocurrencies as financial services for VAT purposes renders them exempt from VAT, as financial services fall within the category of exempt supplies under Section 12 of the VAT Act 89 of 1991 (VAT Act). This exemption implies that neither standard nor zero rates are applicable to financial services. The primary objective of this research is to explore alternative classifications for cryptocurrencies by SARS for VAT purposes. To achieve this, a comparative study was conducted, focusing on the VAT classifications of cryptocurrencies in Bahrain, Thailand, Colombia, and Ireland. The research revealed that Thailand and Bahrain have adopted a categorization resulting in the imposition of actual VAT on cryptocurrency transactions. This finding challenges the argument against levying VAT on cryptocurrencies, based on the perceived difficulty in determining their value and subsequently determining the appropriate VAT charges. Consequently, the study suggests that SARS should explore alternative approaches that may broaden the VAT tax base and enhance the effectiveness of VAT collection in the context of cryptocurrency transa