Crypto Currency Background

This Article is written to give awareness on how the modern world of crypto currency is, from the adoption, accounting and laws regulation specifically in regards to the taxation allowances and charges on crypto currency. Crypto currency is a recent modern of financial transaction in a decentralised space where traders, suppliers and customers exchange business transaction through a specific exchange. Crypto currency came into effect after the release of Bitcoin by its founder Satoshi Nakamoto on 3rd January 2009.

Crypto currency is one of the methods that were seen to support the modern life of Artificial Intelligence (AI) and issues of 4th Industrial Revolution like the introduction. The use of Crypto currency increased more during the Covid 19 era from 2019 to date where traders saw a massive spike in crypto currency, having Bitcoin (BTC) reaching its all-time high. It reached the all-time high of over $70K USD which is approximately 1,115,800 Maloti converted at 31st December 2021 spot rate (dollar to loti of 1:15.94).

Graphical demonstration of BTC Performance to date

Adoption of Crypto Currency

Adoption of the crypto currency and Bitcoin has increased tremendously over the last 13 years to the point where it raised attention of the financial regulation centres from responsible government agencies like Central Banks from various countries. The decentralised nature of the crypto currency means the absence of intermediary between two traders (the buyer and the seller) and therefore means that there is a huge gap in regulation of crypto currency. National Currencies are usually released to the public through responsible national regulation and in the case of block chain there was not such at inception.

Non-regulation of the crypto space meant that there was huge pothole for unauthorised or misuse of the economic funds from individual accounts of the traders and that affected the global economy. There were malpractices made by the exchange traders in which traders funds were misused and ended having problems in funds withdrawals of such traders. We have two recent well known scandals which are FTX scandal lead by a 30-Year-old Bankman Fried who was charged with several charges including $8bn fraud and the second was in relation to Terra the founder of Do Kwon and who is said to have lead the $40Bn terra USD and Luna Tokens collapse in South Korea.

Apart from that, Crypto currency has been said to expose the financial wellbeing of the international global financial market through its high exposure to the risk of cyber-attacks which is one of the biggest information risks. The financial regulators keep updating yearly on the financial loss as a result of cyber-attacks, reporting millions and billions of dollars lost each year. The central banks together with other financial sectors regulators are in the process of understanding and incorporating laws regarding the existence of crypto currency.

Crypto currency or asset trading is one of the risky investments due to the nature of fluctuation value in the market space. People need to understand their risk tolerance rate or their attitude towards risk. Equity investments are said to one of the top risky investments that pays more but are said to be better when compared to the crypto asset trading. There is a need for crypto currency traders to have deep knowledge of what really influences the prices in crypto asset from technical understanding to the fundamentals.

Crypto Currency Tax and Other Related Laws

Whenever you earn returns or profits there is usually a tax element that has to be remitted to the authority for the purpose of governments Budget financing. Crypto currency trading is not exempt into this and therefore there are measures taken by the Tax Authorities to make the crypto traders aware of a need to file and pay taxes on crypto with allowances given by the tax laws on losses and transaction expenses incurred in trading crypto currency.

South African Revenue Services (SARS) has issued a short guide to taxation of crypto assets through its Explanatory Memorandum on the Taxation Laws Amendment Bill issued on the 20TH January 2021.The overall aim was to make the tax payers and the public aware that crypto should be considered as asset unlike the fiat currency (Loti, Rand, Dollar, Pound and etc) which is known to be used in business transaction. SARS in its document on Clause 2 subclause(c) on the Definition of Financial Instrument replaced the word ‘Crypto-currency’ with the Crypto asset. This is also seen on the same document under Clause 23 whereby they stated an Income Tax act Amendments to section 20A.

This is because the nature, investment and value creation of this was seen to occur on its own individual holding rather than when exchanged with other cryptocurrencies like it is the case with fiat currency where one would profit from exchange with other currencies. ‘Tax How’ on the crypto asset is said to form as part of the gross income of a tax payer or alternatively accounted as part of the Eight Schedule to the Act for taxation under Capital Gain Tax (CGT) paradigm. There can be a cost base adjustment if the CGT method of accounting for Crypto asset is chosen.

The Lesotho Income Tax Act 1993 has not dealt with crypto asset in detail but the default formula suggests also that the filling should be made on crypto assets profit generating. Gross income under section 17. Subsection (1) which is subjected to Sub(2) and (3) list the elements of the gross income which includes the below list.

1. Employment income
2. Business Income
3. Property income and
4. Any other income

*The above does not Include amounts exempt from Income Tax.

The last part of the list (Point number 4) could be said to be the section in which the crypto asset profits fall in the case where a tax payer is not into business of trading crypto.

SARS as a form of tracing crypto assets is given powers in terms of the Income Tax, Including the requirement for third party service providers to submit financial data.

Accounting for Crypto Assets

According to the article written by Georgina Kyriakoudes there are multiple Financial Reporting Standards that were tested for crypto asset accounting and reporting. The first one is IAS 38 which is accounting for Intangible assets. Crypto currency definition includes the term ‘intangible asset’ and therefore drives the financial statements readers to categorise it as an intangible asset.

Apart from that the crypto asset reporting was said to qualify heavily to be treated under the IFRS 9 which deals with financial instruments and financial assets. However, the below explanation as per the KPMG article on crypto will elaborate why they failed to be treated under IFRS 9.

The KPMG accounting for crypto assets suggested that the US GAAP treatment on crypto currency is not yet been dealt with in the US however the document stated that most of the accounting treatment on crypto asset is based on Tangible assets treatment. The Treatment under Intangible asset is said to be by default because;

1. They do not meet the definition of ‘cash and cash equivalent’, ‘financial assets’ and ‘financial instruments or ‘Inventory’. They do not meet the cash and cash equivalent criteria as they are not legal tenders issued by the government. Apart from that they cannot be treated as financial assets or instruments due to the fact that they do not give the holder either an ownership interest in another entity, or a contractual right to receive cash or another financial asset or instrument. Also, they cannot meet the definition of the inventory under IAS 2 due to the fact that they are not tangible.
2. The broad nature of the Intangible assets. In the US this is considered to be a fair treatment of crypto asset as per the FASB’s Conceptual Framework. They could be adopted under the IAS 38(Intangible assets) as per the IFRS and Accounting standards under the IFRS conceptual framework.

Holding Crypto Assets requires the reporters on financial statement to state their useful life, whether is finite or infinite.

Crypto assets are considered to have indefinite life due to absence of legal, regulatory, contractual, competitive, economic or other factors that limit their useful life to the holder and they are therefore not amortised but rather reviewed for Impairment and of which IAS38 will be used in the case whether the reporting entity uses the IFRS framework.

Article Writing Referencing

1. Lesotho 1993 Income Tax Act.
2. KPMG article on Accounting for Crypto assets.
3. South African Revenue Services Guide on Crypto assets.
4. Explanatory Memorandum on Taxation Laws Amendments Bill
5. Different Accounting Options for Crypto assets (Listed on ACCA)

Written by:
Lehlohonolo Rakubutu (Upcoming professional accountant and Business and Economic Commentator.