A critical analysis of the effectiveness of taxation regulation of cryptocurrencies in mitigating the facilitation of tax evasion in South Africa.
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Date
2021
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Abstract
In finance, law and technology, change is an inevitable result of development. Whilst
governments, legal authorities and financial regulatory bodies may be sceptical or hesitant to
accept the natural progression of technology, the digital revolution will not regress, but merely
continue to thrive against a background of hostility. Thus, the importance of regulatory
structures which effectively standardise digital innovations is reflected through the necessity
thereof. It is submitted therefore, that it is wise to mitigate the consequences of the ineffective
regulation of digital innovations. One such innovation which has been exponentially gaining
traction in the field of technology is that of cryptocurrency.1
This research explores the need for effective cryptocurrency regulation by examining the
necessity of a solid legal regulatory foundation upon which it may be integrated into the
financial sphere in South Africa.2 Submissions will be made that it is insufficient to merely
impose superficial legal regulations on cryptocurrency without accounting for various factors
of consideration where the novelty of cryptocurrency is concerned in relation to the nature
thereof. In SA specifically, taxation authorities3 have been implementing regulations regarding
cryptocurrency, which will be analysed and evaluated through this research.
In the likely event of cryptocurrency becoming a primary medium of transacting, the taxation
regulations thereof must be effective to mitigate any negative effects (of insufficient and
ineffective regulation) for taxpayers and the fiscus. It is imperative that regulatory bodies such
as the legislature and the South African Revenue Service,4 ensure that the regulation of
cryptocurrency in SA is effective so that any lacunae in existing legislation which could yield
negative consequences for taxpayers and/or the fiscus are adequately addressed and effectively
mitigated.
From a taxation perspective, it is submitted that one of the main negative consequences of the
lack of effective regulation of cryptocurrency is the potential of tax evasion. Tax evasion in relation to cryptocurrency will be analysed and discussed in this research based on the nature
of cryptocurrency. The lack of cryptocurrency regulation is also cause for concern among
taxpayers who use cryptocurrency without surety of how the proceeds therefrom will be taxed.
Recommendations will thus be made regarding the implementation of a legislative definition
of cryptocurrency to provide preliminary regulatory clarity on the taxation of cryptocurrency.
This research envisages that the lack of understanding and effective regulation of
cryptocurrency in SA should also be addressed by advisory, regulatory and authoritative bodies
insofar as these bodies taking active steps to resolve the confusion surrounding the
categorisation of cryptocurrency is concerned. The effectiveness of taxation regulations (or
rather, the lack thereof) of cryptocurrency in SA will therefore be examined through this
research, by analysing existing plans, proposed policies and new legislation as well as
criticising the lacunae in the law which exist in cryptocurrency regulation. Furthermore, this
research aims to prove that cryptocurrency regulation in SA is inadequate and ineffective. This
issue will be explored in a holistic sense in order to assert that the lack of adequate
cryptocurrency regulation is in fact a global issue. The legislation addressing the taxation of
cryptocurrency in SA will be evaluated in order to ascertain whether the relevant legislative
provisions will be sufficient in addressing the issues related to the taxation of cryptocurrency
and tax evasion specifically, and subsequently used to prove that cryptocurrency regulation is
in fact insufficient.
In addressing the issues explored through this research, it is proposed that the nature of
cryptocurrency must be considered as the foundation upon which the legislature constructs
cryptocurrency regulations. From a practical perspective, it is proposed that a formal definition
of cryptocurrency be implemented in legislation (in order to provide further clarity on the
taxation treatment thereof) and a provision be inserted in legislation addressing the taxation
treatment of cryptocurrency. It is also recommended that the UK and Germany be looked
towards for cryptocurrency regulation in terms of SARS implementing an interpretation note
thereon as well as ensuring that the content of the interpretation note/position paper is
formulated in accordance with the UK government’s position paper on the taxation treatment
of crypto assets. This research proposes that authoritative bodies must ensure cohesion
regarding the categorisation of cryptocurrency as well as regulation thereof in order to provide
clarity on cryptocurrency regulation as well as ensure the effective regulation thereof.
Description
Masters Degree. University of KwaZulu-Natal, Durban.