As things stand, cryptocurrencies such as Bitcoin have managed to navigate their way through the global financial markets, despite reservations and opposition from a number of central banks.
Transacting in cryptocurrencies has become a hot topic, so much so that Namibia is in the process of working on modalities related to taxing cryptocurrencies as well as to pursue whether trading in such currencies is being used as a tax avoidance method.
Finance minister Calle Schlettwein, during an interview this week with this publication, said government does not want to encourage people to engage the use of Bitcoins or virtual currency as it is speculative.
Schlettwein said he believes some people use it as a cartel to avoid taxation and should the government be certain that these are the issues, “we will have to investigate.
We will not allow such schemes to flourish at the expense of tax collection. I also know that the Bank of Namibia has issued a stern statement on the use of Bitcoins recently,” Schlettwein said.
Backers say virtual currencies allow for an efficient and anonymous way to store and transfer funds online.
But virtual currencies, most famously Bitcoin, have come under increasing scrutiny by financial regulators as their popularity has grown.
Several countries have warned users of the risks associated with Bitcoin, such as their susceptibility to fraud because of the difficulty of tracing transactions.
Global banking regulators called on banks not to deal in virtual currencies until rules are developed to stop them from being abused.
With the debate on cryptocurrencies being elevated across the global financial arena, in Namibia it is slowly gaining momentum and several Namibians having begun transacting in cryptocurrencies such as Bitcoin. There are also calls for the country’s tax authorities to begin looking at possible tax implications for such traders to generate more revenue for the State.
PwC’s International Tax Partner Johan Nel says cryptocurrencies will challenge the conventional systems as time passes; he has one concern however: tracing the profits derived from trading in cryptocurrencies.
“Yes I believe it is a topical matter. There is already general principles contained in the current legislation to address the tax implications from trading in cryptocurrencies, but any additional guidance by Inland Revenue would be most welcome. The challenge would be to trace the profits made and for taxpayers to declare these profits,” he said.
Just across the border in South Africa, SARS is treating cryptocurrencies under Capital Gains Tax. When asked about the possibility of Namibia pursuing a similar move, Nel said: “Seeing that Namibia does not currently have capital gains tax in place, it would be difficult to pursue this. However under the current income tax legislation, it is important to note the following with regards to the taxability of income.
The Namibian gross income definition in Section 1 of the Income Tax Act states that a taxpayer is liable for tax on the total amount, in cash or otherwise, received by or accrued to the taxpayer; from a source or deemed source within Namibia and provided that the income is not of a capital nature.”
The term “capital in nature” has been the subject of a lot of tax case law, said Nel, adding that one of the tests for determining the true nature of a receipt or accrual for income tax purposes is whether it constituted a gain made by an operation of business in carrying out a scheme for profit making (Samril Investments (Pty) Ltd v SARS (2003) ZASCA 118, 2003 (1) SA 658 (SCA).
“However, profit-making is also an element of capital accumulation. Each case should be decided on its own facts. The mere intention to profit is not conclusive. There must be a business operation carrying out a profit making scheme for a gain to be recognized as income for tax purpose. That usually involves an effort by the taxpayer to make use of his/her resources and skills to generate profits of an on-going nature. This would most likely be the case for traders in cryptocurrencies,” he said.
Nel doubts whether a deduction would be made available on cryptocurrencies.
“It is like any other investment that you make. The value of investing into an asset is seldom deductible for tax unless it has some form of productive capacity. For traders, a deduction may be available where the instrument is treated as trading stock and therefore the profits and losses realized on the buying and selling may be deductible for tax,” explained the tax guru.
But despite the positive hype around virtual currencies, critics are convinced that it is a money laundering scheme while others label it as anonymous trading. Nel has concerns around illicit flows of money and the difficulty in tracing the funds from a tax perspective.
“It is more difficult to manipulate the value of the currency. Bitcoin has been labelled “ the first decentralized electronic currency not controlled by a single organization or government”. Recently De Beers launched their own blockchain and this will enable them to keep track of movements of the diamonds they buy and sell. The same was also done with Kodak to give photographers a new revenue stream and a secure platform for protecting their work,” he said.
He concluded: “I am sure that there will be many more to follow. It is difficult to predict the future though as we have seen with the recent decrease in the value of Bitcoins that slumped since December.”
Another tax expert, Gerda Brand from Deloitte, said there are a number of current tax provisions that could already apply in some instances.
“For example where Bitcoin is used for the payment of goods or services, this could be seen a barter transaction for VAT purpose. Where one deals with the spend or investment in cryptocurrencies, there are a number of principle questions that need to be dealt with before tax implications could be considered e.g. are cryptocurrencies an asset or currency etc,” she explained.
She added: “If it is property, the further question is whether the spending was done with an investment objective or a profit-making objective – the tax implications could flow from here. The gain or loss on a profit-making asset would generally be taxable / deductible. A gain or loss with an investment objective is generally capital in nature and not taxable/ deductible. However, clear guidance from the Revenue Authorities would result in certainty and to some extent avoid different interpretations and applications of the laws.”
While SARS is treating crypto-currencies under Capital Gains Tax , Brand said a Capital Gains Tax legislation could address the question in Namibia as well, but it may be difficult to enforce.
She said, like any form of payment, cryptocurrencies could be used in money laundering schemes.
“Therefore, I would not necessarily label it as such a scheme in itself. The reality is that cryptocurrencies could be a very convenient way in receiving or making payment for goods and services. However, I do believe that some regulations are required to protect investors and users and to ensure a fair tax treatment (both for the user and government),” she said.