Virtual assets are slowly taking a critical role in commercial transactions, especially as a mode of transaction as well as investment options. We must admit that technology and business trends continue to evolve and that has somewhat overtaken the tax laws we currently comply with. We will address the tax implications arising from transacting in virtual assets such as cryptocurrencies in detail below. In this article, words importing the masculine shall be deemed to include the feminine.
Enter CGT
If someone holds a virtual asset over a long time (such as a minimum of 12 months) and then sells the said asset, they will find themselves paying a tax called Capital Gains Tax (CGT). CGT is a tax which is payable on the positive difference between the disposal value of any asset and its cost. For example, if company A purchases cryptocurrencies at P100,000 and sells them at P150,000 after a year as stated above, then its potential capital gain will be P50,000. However, the Income Tax Act allows for an inflation deduction equivalent to 25 percent of the potential capital gain, which means that only 75 percent of the P50,000 would be subject to tax. The Income Tax Act does not categorically single out virtual assets as falling in the definition of taxable items but its use of the phrase, ‘any property,’ makes it patent that the disposal of such assets is also subject to CGT.
Enter Income Tax
On the other hand, if a person holds the said cryptocurrencies not as capital assets but more as stock, they pay Corporate Income Tax or Personal Income Tax if they realise a profit from the appreciation in that stock. The gain in value will basically be the difference between the assets’ disposal value and the cost. Tax is limited to the amounts which are realised, i.e., the amounts in respect of which an actual sale transaction would have occurred. Just like any other foreign currency gain, no tax applies until such turns out to be realised. Using the example above, if a company acquires the said currency as stock and disposes of it after 2 months, it will be subject to Corporate Income Tax on the P50,000 without the 25 percent inflation adjustment stated above.
VAT
The VAT Act doesn’t recognise cryptocurrencies as falling within the broader definition of money. However, it cannot be denied that such currencies are in fact a mode of exchange and therefore, any provision which relates to money applies to them. In general, transactions relating to money are outside the scope of VAT and that means no VAT applies on gains or losses or actual sale transactions of cryptocurrencies. However, should it happen that someone transacts in cryptocurrencies and earns a fee or commission from such transaction, then such fees or commission will be subject to VAT if that person is VAT-registered. If the trader isn’t VAT-registered, they need to register with BURS the moment they expect or that they actually reach P1 million in annual turnover.
Conclusion
Transactions in virtual assets are, as stated above, subject to CGT or Income Tax depending on the motive of the person making any gain from such transactions. If the assets are held as an asset for capital appreciation, CGT will be payable but if they are held as revenue assets, then CIT or Personal Income Tax will be payable. We hope that was insightful.
Tax hint
If you have never had a tax audit conducted on your business by a tax firm, we highly recommend that you consider such so as to proactively reduce tax gaps. As we say goodbye, remember to pay Caesar what belongs to him. If you want to consult, join our free Tax WhatsApp group or to know about our 9 Tax e-books, send a text to +267 7181 5836 or email us at jhore@aupracontax.co.bw. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.
