Taxes, cryptocurrencies and a potential loophole in South Africa


With the crypto market in full swing, especially the trading of NFTs for often staggering amounts of money, tax authorities worldwide have raised eyebrows about the potential tax implications of the NFT market, notes Baker McKenzie Johannesburg.

Before looking at the load on NFTs, it is important to understand what they are. Basically, an NFT, or non-fungible token, is a unique blockchain-based digital asset.

Being unique in its properties, an NFT cannot be duplicated and the content associated with it can take any digital form, for example an image, piece of music, video or other digital content that can be traded or exchanged on an NFT market . Undoubtedly, an NFT is defined by its value, not its unique properties.

Some NFTs are also made to be used as entry tokens for exclusive social clubs, such as the Bored Ape Yacht Club (BAYC). These NFTs act as entrance tickets and entitle their owners to access exclusive digital services and spaces.

With the often thriving crypto market, especially the trading of NFTs for often staggering amounts of money, tax authorities worldwide have raised eyebrows about the potential tax implications of the NFT market.

NFTs within the global tax framework governing digital services

Currently, a globally accepted and comprehensive solution to the taxation of NFTs remains unclear. This is due to the fact that the tax treatment of NFTs would require different considerations regarding their characterization and application within existing global tax rules.

Another potential problem is the valuation of NFTs for tax purposes, as there are limited guidelines in this regard. The Tax and Customs Administration therefore appears to be catching up. In some cases, however, there are tax authorities who believe that the current legislative measures are sufficient to absorb the tax on NFTs.

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In order to determine whether VAT is applicable to the supply of NFTs, it is important first to determine whether the supply of NFTs would include a supply of electronic services, as defined.

On a global scale, in accordance with Directive 2006/112/EC of the Council of the European Union, Council Implementing Regulation (EU) No 282/2011 and the 2021 United Nations Model Convention, existing definitions of electronic services may be broad enough to NFTs within the scope of the definition of electronic services, in particular because it provides for the taxation of automated digital services that require minimal human interaction.

It is unlikely that legislators explicitly intended to take NFTs into account when these provisions were made, but the wording of these provisions was broadened to take into account future developments in the digital economy.

An overview of the tax treatment of NFTs in Spain

The Spanish tax authorities (STA) recently issued a ruling on the matter after considering that NFTs, essentially “digital certificates of authenticity”, created two different digital assets after minting, namely: the underlying digital asset (being the image, music, video, etc.) that can be presented digitally, and the NFT itself, which represents digital ownership of certain rights in the underlying digital asset.

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In their justification for this conclusion, the STA emphasized that NFTs could not fall within the scope of the supply of goods as they did not entitle the buyer to any right to material property. Consequently, there was no delivery of an actual asset and therefore the delivery should be subject to VAT.

Could South Africa take a similar approach?

South African VAT law defines electronic services, subject to certain specific exclusions, as any service provided by means of an electronic agent, electronic communication or the Internet, for whatever reason. It is clear that an offering that relies on information technology, is automated and with minimal human intervention falls under this definition.

However, before concluding that the supply of an NFT for South African VAT purposes would fall under this definition, it should be considered whether it would be considered as a delivery of Services.

Under the VAT Act, goods are tangible movable property, fixed property and any right in rem to such fixed property, while fixed property is specifically defined as land, section titles and shares in a block of shares arrangement.

Services, on the other hand, means anything to be done or done, including the grant, assignment, assignment or waiver of any right or making available any facility or benefit. Given these very specific definitions, it is clear that the supply of an NFT, which is not a tangible movable property, cannot be regarded as a supply of goods, but rather a supply of services.

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Since it is delivered electronically, it can be concluded that the supply of NFTs should fall within the scope of the definition of electronic services and would therefore incur South African VAT.
Closing Notes

As simple as this may seem, we warn that it gets more complex, especially when we consider how blockchains work.

In order for a non-resident supplier to be providing electronic services in South Africa, that supplier would need to supply to a customer based in South Africa or a customer with a residential, postal or business address in South Africa , and would be paid by that customer from a South African bank account.

An important consideration here is the anonymity of blockchain transactions and thus the difficulty, if not unfeasibility, for the seller to determine the identity and location of the buyer of the relevant NFTs.

In essence, this makes the enforcement of VAT obligations on non-resident suppliers of NFTs extremely difficult, if not unlikely, and therefore currently creates a loophole. Given the staggering amounts of money NFTs are being sold for in the digital markets, this is certainly an area where the tax authorities could focus more, rather than catching up with innovative digital transformation.

  • By Jana Botha, Senior Tax Adviser, and Francis Mayebe, Attorney Candidate, Tax Practice, Baker McKenzie Johannesburg

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