A recent report from Israeli blockchain portfolio platform, Blox, reveals that a new breed of digital-savvy accountant is emerging. These blockchain boffins are arriving not a moment too soon, as tax authorities around the world begin clamping down on cryptocurrency disclosures.
Faith Ngwenya, Technical and Standards Executive at the South African Institute of Professional Accountants (SAIPA) welcomes a similar trend locally. “As the use of cryptocurrency grows and the regulations governing it are refined, users may need to prove they have met their past tax obligations,” she says. “Without accurate accounting records and correct tax submissions, they could find themselves in hot water with SARS.”
Not a currency!
It’s important to recognise that cryptocurrency is treated differently in various part of the world. In some countries, like the US, it is legal but is not considered a currency. In others, like Morocco, all virtual currencies are prohibited under law. And some, like Canada, prescribe regulated use while banning it from banking transactions. In South Africa, it’s not legal tender (only the Reserve Bank can issue currency) but an intangible asset and is taxed in relation to how it is traded.
According to SARS, taxpayers dealing in cryptocurrency will be taxed differently depending on the type of activities they perform. These include issuing a cryptocurrency, mining transactions, speculating, and doing business using the currency as a medium of payment. In general, where it is bartered in exchange for goods or services in the course of business, it is taxed under “gross income” and deductions can be claimed against the effort to earn it. When it is speculated on, CGT rules come into play. If an employer pays staff in cryptocurrency, it will be taxed as normal income. The exact treatment will depend on the specific use as determined by SARS.
A virtual ledger?
Also, the so-called “distributed ledger” associated with a basic blockchain system bears little resemblance to the typical general ledger used by accountants. The latter posts balancing debit and credit transactions into appropriate accounts that are themselves grouped into financial reporting categories. A blockchain entry may hold little more information than “User A sent X units of cryptocurrency to User B on a given date”. In the accounting sense, it’s not even a virtual journal, but rather a record of original entry. “Like any source documents, these transactions need to be extracted and recorded in a formal financial ledger to correctly determine one’s tax obligation,” says Ngwenya.
As more users become aware of the risk of not keeping their cryptocurrency affairs in order, the demand for crypto-smart accountants is on the rise. Many Professional Accountants have already responded by getting to grips with not just the mechanics and processes behind blockchain but also the growing body of regulations evolving around it.
“While there is a steady growth in the number of practitioners who can provide financial and reporting services around blockchain, the level of their expertise varies,” says Ngwenya. “It is always best for those seeking assistance to determine how knowledgeable their Professional Accountant is about these matters.”
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