This is the second article discussing the basics of the SARS Draft Guide to the Taxation of Crypto Assets published in July 2026.
The crypto asset market is dynamic and subject to constant change and innovation. Consequently, the detail of a particular transaction involving crypto assets is the starting point for any consideration of the income tax consequences of that transaction as well as the impact thereof on the parties’ tax positions.
Selling crypto assets for fiat currency
The tax treatment of receipts from the disposal of crypto assets for fiat currency depends on whether the crypto assets are of a revenue or capital nature. If they are of a revenue nature, these receipts will be included in gross income and, after applicable deductions, subject to normal tax (effective tax rate ranging between 18% and 45%). If they are of a capital nature, the receipts will be included in proceeds and, after applicable base cost deductions, subject to CGT (effective tax rate ranging between 18% and 36%). While it is necessary to meet all the requirements of the relevant definitions and applicable sections, a comparison of the definitions of “gross income” and “proceeds” reveals that the main differentiator for tax purposes is generally whether the receipts are of a revenue or capital nature.
The amount for tax purposes will be the fiat currency received or accrued from the disposal. If required, this amount will be translated under section 25D or paragraph 43, as appropriate. The timing of the receipt or accrual will depend on the specific facts of the case. For transactions conducted on an exchange platform, processing of the transaction is often very fast, meaning the receipt (when the amount is credited to the taxpayer’s wallet) and the accrual occur simultaneously. However, it is sometimes necessary to examine the underlying contracts to determine when the amount accrues to the taxpayer and, if applicable, to consult the wallet or other sources to ascertain when the amount is received, for example, in an off-chain transaction.
A resident’s “gross income” as defined in section 1(1) includes “the total amount, in cash or otherwise, received by or accrued to or in favour of such resident … excluding receipts or accruals of a capital nature …”.
Paragraph 35(1) describes “proceeds from the disposal of an asset” as “the amount received by or accrued to, or which is treated as having been received by or accrued to or in favour of, that person in respect of that disposal, and includes…”
Both definitions contain specific inclusions not detailed above. Refer to the Act for more detail.
From a deduction perspective, a taxpayer must assess whether they meet all the requirements of a potentially applicable deduction section or paragraph. For a taxpayer holding crypto assets on revenue account, the general deduction formula is one of the sections to consider regarding whether expenditure incurred in connection with their crypto assets may be deducted from income. Under the general deduction formula in section 11(a), read with section 23(g), when determining taxable income from carrying on a trade, a taxpayer may deduct expenditure and losses actually incurred in the production of income, provided such expenditure and losses are not of a capital nature. 82 This means, for example, that the cost of acquiring the crypto asset will generally qualify for a deduction under section 11(a). The trading stock provisions may also be applicable.
If a taxpayer holds crypto assets on capital account, Part V of the Eighth Schedule, which deals with base cost, must be considered to determine if the taxpayer qualifies for a base cost deduction. In this regard, it bears notice that the same crypto assets (for example, two units of crypto asset A) constitute “identical assets” within the meaning contained in paragraph 32(2). Consequently, the base cost of such identical crypto assets (for example, two units of crypto asset A), if held on capital account, must be determined using either the specific identification method or the first-in-first-out (FIFO) method. The weighted average method for calculating base cost is not available because crypto asset exchanges are not currently “recognised exchanges” as defined.
Selling or swapping a crypto asset for a different crypto asset
Exchanging one crypto asset for another, whether as a trading pair on the same platform or through an ad hoc transaction with another party, is considered a barter transaction. However, if trading one crypto asset for another involves an intermediary step of converting the crypto asset to fiat money, and then using that money to purchase a different crypto asset, it is not a barter transaction. Instead, it constitutes the selling of a crypto asset for fiat currency and a subsequent purchase of a crypto asset for fiat currency.
The income tax principles applicable to exchanging one crypto asset for another are generally the same as for a crypto asset that is sold for money. However, quantifying the proceeds and expenditure involves additional considerations. For example, if X exchanges one unit of Crypto A for one unit of Crypto B, the expenditure incurred by X in acquiring Crypto B is the market value of Crypto A. Additionally, X has disposed of Crypto A and will need to account for any gain or loss on that disposal. The amount received from the disposal of Crypto Asset A will be equal to the market value of Crypto B, and the expenditure actually incurred in acquiring Crypto A will generally be allowed as a deduction from income or included in the base cost (depending on whether the crypto assets were held in revenue or capital accounts).
In a barter transaction, the market value of the assets (or services) exchanged will, “absent any contrary indication”, be the market value of those assets (or services) received. The exchanged assets would thus generally be of equal value. However, the specific facts of the transaction must be considered, as the market value of the crypto assets exchanged may differ and, if so, this difference would need to be accounted for. The income tax (including CGT if applicable) consequences occur at the time of the transaction and are not deferred until the crypto asset is sold for fiat money.
Paying for goods or services using crypto assets / “receiving” crypto assets for the payment of goods or services.
Although crypto assets are not classified as legal tender in South Africa, a growing number of businesses accept them as payment for goods or services. Depending on the particular transaction, a payment for a good or service using a crypto asset could be a direct barter transaction between two parties. In such cases, the principles outlined in the section “Selling crypto assets for fiat currency” above apply to the disposal of the crypto asset, along with the “normal” income tax consequences for the purchase of the goods or services acquired (as would have arisen if they had been acquired for fiat currency). Alternatively, the transaction may involve a “crypto-converting intermediary” that converts the crypto asset from the purchaser to fiat currency (either directly or using third-party exchanges) and then uses that fiat currency to pay the seller on behalf of the purchaser.
Here, the principles in “Selling crypto assets for fiat currency” above are applicable to the disposal of the crypto asset, along with the “normal” income tax consequences for goods or services acquired for fiat currency. In the latter scenario, the process is often handled through an app, and the purchaser may be unaware that a two-step process is involved. For example, in order to pay for groceries using crypto assets in South Africa, it is necessary to hold the crypto assets in digital wallets designed for small, fast, and frequent transactions, such as Lightning wallets (in the case of Bitcoin) or Luno Pay (which supports Bitcoin, Ethereum, and stablecoins). Generally speaking, the retailer does not directly acquire the crypto assets used by the customer. Instead, an intermediary is involved that uses the fiat currency realised from the sale of the crypto assets, on behalf of the customer, to pay the retailer for the goods purchased by the customer.
It is therefore always important to understand the different steps involved in a transaction so that the tax consequences can be correctly determined. While not always the case, sometimes a different approach can lead to a different tax outcome. It is not possible to provide further guidance in this guide without knowing the details of a particular transaction.
Services rendered by an employee in exchange for crypto assets and crypto assets granted as a benefit or advantage in respect of employment
Broadly, paragraph (c) of the definition of “gross income” includes in gross income any amount, including any voluntary award, received or accrued in respect of services rendered or to be rendered, or any amount received or accrued by virtue of any employment or the holding of any office. The courts have held that “in respect of”, as used in paragraph (c) of the definition of “gross income”, links a causal relationship between the amount received and the service rendered. The same meaning is applicable in the paragraph (i) of the definition of “gross income”, as considered below.
If an amount falls within the ambit of both paragraph (c) and the paragraph (i) (see below), the provisions of the paragraph (i) of the definition of “gross income” apply. Paragraph (i) of the definition of “gross income” provides for the inclusion in gross income of the cash equivalent of any benefit or advantage granted in respect of employment or the holding of any office, as determined under the provisions of the Seventh Schedule. This inclusion in gross income comprises the cash equivalent of a taxable benefit, as defined in the Seventh Schedule, along with any amount required to be included in the taxpayer’s income under section 8A. Broadly, paragraph 2(a) of the Seventh Schedule deems a taxable benefit to have been granted by an employer to an employee if, as a benefit or advantage of or by virtue of such employment, or as a reward for services rendered or to be rendered by the employee to the employer, any asset (specifically including any financial instrument, and a crypto asset is a financial instrument) has been acquired by the employee either for no consideration or for a consideration less than the value of such asset, as determined under paragraph 5(2) of the Seventh Schedule. 90 Thus, under paragraph 5 of the Seventh Schedule, the cash equivalent of the taxable benefit that is included in gross income under the paragraph (i) of the definition of “gross income” is the market value of the asset at the time it is acquired by the employee less any consideration given by the employee.
The Fourth Schedule: Withholding of employees’ tax by employer
Paragraph 2(1) of the Fourth Schedule requires that every resident employer or representative employer who pays or becomes liable to pay any amount by way of remuneration to any employee shall, unless the Commissioner has granted authority to the contrary, deduct or withhold employees’ tax from that amount and pay it to SARS on behalf of the employee.
Amounts (that would otherwise be remuneration) paid to an employee are excluded from the definition of “remuneration” in the Fourth Schedule if that employee (as defined) carries on an independent trade. The ‘independent trade’ exclusion contains statutory tests that, if met, override the factual position, deeming a person not to carry on a trade independently for employees’ tax purposes. For example, this applies if the services required are to be mainly performed at the premises of the person who must pay for such services, or if the person who rendered or will render the services is subject to the control of any other person as to the way the duties are to be performed.
The detailed facts of a particular case must always be examined, but prima facie an employer who pays an employee an amount of remuneration in the form of crypto assets must withhold and pay over the employee’s tax to SARS.
Crypto arbitrage
Crypto arbitrage is a trading strategy that takes advantage of price differences for the same crypto asset across different exchanges. An arbitrage trader buys at a low price on one exchange and sells for a higher price on another exchange, profiting from the discrepancy in prices. This type of arbitrage trading is known as spatial arbitrage. Triangular arbitrage, on the other hand, exploits the price differences between three crypto assets on the same or separate exchanges. Arbitrage trading is inherently profit-driven. Accordingly, all actions by an arbitrage trader will be in the revenue account. Being of a revenue nature, profits and losses will effectively be included in taxable income.
Earning crypto assets through mining
Crypto asset mining is described as a “proof of work” consensus algorithm mechanism for validating transactions in a blockchain. A distributed set of computers reaches consensus on which group of transactions will be appended to the blockchain next. Mining requires significant computing power and, hence, investment in computer hardware and electricity.
Each validating node (called a “miner”) in the network uses computing power to try to be the first one to solve a mathematical problem, that is, to validate the transaction and generate the code for purposes of adding it to prior blocks (which all other miners agree is the truth). The winning validating node (“miner”) is rewarded with a newly minted crypto asset, or portion of a crypto asset, and the block’s related transaction fees. A taxpayer conducting an activity of crypto asset mining meets the definition of a person conducting a “trade”.
As noted above, at the time the blockchain transaction is successfully verified, the miner is rewarded with a crypto asset or a portion of a crypto asset. The miner must include the market value of the crypto asset in gross income because the following requirements of the definition of “gross income” are met:
• Total amount in cash or otherwise – the crypto asset is an intangible asset which is given to the miner in a form other than money. The crypto asset has a market value which can be established as it can be traded between independent persons on the digital network.
• Received from or accrued to – on successfully being the first person to verify the transaction, the miner is entitled to the crypto asset in return for the verification work conducted. The miner is entitled to the crypto asset and receives it for their own benefit.
• The amount is not of a capital nature – the receipt or accrual of the crypto asset by a miner is of a revenue nature, as it is something that the miner has deliberately worked for and is not fortuitous in nature. In addition, a reward is given for the service of successfully verifying a transaction, and therefore it falls within paragraph (c) of the definition of gross income (“received or accrued in respect of services rendered”) and would therefore have been included in gross income irrespective of whether it is of a revenue or capital nature.
For purposes of gross income, the market value of the crypto asset must be established at the earlier of the receipt or accrual of the crypto asset, which is generally when the crypto asset is added to the miner’s digital wallet. A crypto asset will be considered trading stock for the miner if it is acquired as part of their mining trade and with the intention of selling and exchanging it for profit. If it is trading stock, then sections 11(a) and 22 are relevant. Miners must also consider any expenditure they incur, as they may be entitled to a deduction or allowance if they meet the requirements of one of the relevant sections. For example, they might be entitled to a wear-and-tear allowance under section 11(e) for the computers used in the “mining” process or a deduction under section 11(a) for electricity used in the process and salaries paid to staff to run the computers.
If the crypto asset was held by the miner on capital account, the provisions of the Eighth Schedule would need to be considered.
Mining partnerships
In the event miners share resources, form a mining pool, and split the reward proportionately in accordance with the partnership profit or loss sharing ratio, the tax provisions applicable to a partnership will apply to the mining partnership. This means that the same tax provisions that apply to crypto asset mining will also apply to the individual members of the partnership.
Earning crypto assets through staking
The alternative to “proof of work” discussed in the “Earning crypto assets through mining” section above is “proof of stake”. This method does not require significant hardware and electricity. Instead, it requires people to risk their reputation and capital (in the form of crypto assets) to help validate transactions. A validator may forfeit its stake if it validates a fraudulent transaction or engages in other behaviour detrimental to the protocol in terms of what is known as the ‘slashing rules’. Thus, by placing something at stake, the validators are incentivised to be honest. As a reward, the selected validator receives additional crypto assets.
The discussion above on “proof of work” (mining) is also applicable to “proof of stake” as it relates to the inclusion of the market value of the crypto asset earned in gross income, as well as the treatment of trading stock under section 11(a) and section 22.
It is possible that all or some of the crypto assets staked to enable a person to potentially be selected as a validator for transactions may not be returned to the person because of penalties imposed by a blockchain network. This will have income tax consequences depending on, amongst others, the structuring of the staking and the applicable forfeiture. It is important to understand the detailed facts and circumstances of the relevant staking arrangement, as these arrangements are not necessarily standard. The existing provisions of the Act and case law must be applied to the facts and circumstances of staking arrangements as they relate to possible forfeiture to determine the income tax outcome for the participants.
Decentralised finance (“De-Fi”)
Decentralised finance is an alternative financial system that uses blockchain and smart contracts to provide a variety of financial services, ranging from something as “simple” as “lending and borrowing” to complex derivative transactions. This guide does not deal with De-Fi arrangements other than to state the importance of understanding the particular arrangement in detail and applying the normal tax principles to consider the income tax and CGT consequences of a particular arrangement.
Initial coin offerings, air drops and hard forks
An initial coin offering occurs when a new player wishes to introduce their crypto asset to the market. A popular method of creating a market for a new crypto asset is by airdropping the new crypto asset to existing digital wallet addresses. These distributions are often made by a blockchain start-up, usually for free, as a way of gaining attention and new followers, thereby resulting in a larger user base and a wider disbursement of coins. However, an airdrop may also be the result of some effort from the recipient, for example, performing specific tasks on or for the specific crypto asset platform. An airdrop can also be the result of a hard fork split of a crypto asset, resulting in the creation of a new crypto asset, which is then airdropped to the holders of the original crypto asset that was subjected to a hard fork.
Receipt of an airdropped crypto asset
In determining whether a taxpayer will be taxed on the receipt of an airdropped crypto asset, the definition of “gross income” must be considered. Generally, in the case of an airdropped crypto asset, there is an amount, in cash or otherwise, that has been received by or accrued to the taxpayer. The aspect which may be subject to more debate is whether the amount received is of a revenue or capital nature. The normal income tax rules apply in making this determination and depend on the specific facts and circumstances of the taxpayer.
One of the most relevant principles in this context is that receipts or accruals are considered revenue if they are not fortuitous but rather designedly sought and worked for. Conversely, if they are fortuitous and not designedly worked for, they bear the imprint of capital. The specific facts of a particular airdrop must therefore be considered to determine what the taxpayer was required to do to obtain the airdropped crypto asset. This will establish whether the crypto asset was “designedly sought for and worked for” or whether it was fortuitous. If the amount is of a revenue nature, it must be included in gross income when the taxpayer calculates their taxable income.
The nature of the airdropped crypto assets in a specific taxpayer’s hands determines the “cost” to be recorded in relation to the underlying crypto asset. For someone who holds crypto assets as trading stock, section 22(4) broadly provides that if any trading stock has been acquired for no consideration, or for a consideration which is not measurable in money, the cost price of the trading stock for purposes of closing stock [section 22(1)] and opening stock [section 22(2)] is equal to the current market price of such trading stock on the date it was acquired. The matter is more complicated for crypto assets received as capital assets. Paragraph 38 would usually apply to give an asset a cost equal to its market value when a person disposes of an asset (this concept is defined widely and includes the creation of an asset) by means of a donation, for a consideration not measurable in money, or to a connected person for a consideration which is not arm’s length. However, in relation to airdropped crypto assets, there may not be a person that, in creating the crypto asset airdropped to a taxpayer, has had any of their existing rights diminished. As a result, there may not necessarily be a person that disposes of an airdropped crypto asset. In many cases, the airdropped asset originates from the operation of the blockchain, and there is no associated diminishment of any person’s rights. In those cases, paragraph 38 will not apply, and a fortuitous receipt of a crypto asset would have a cost of Rnil. Nevertheless, if the airdropped crypto asset originates in consequence of any service rendered by the recipient, the value of the service would be equal to the expenditure incurred in acquiring the airdropped crypto asset, as the exchange is a barter transaction.
Hard forks
A hard fork is described as the permanent splitting of a crypto asset’s blockchain as a result of a protocol change that is not backward-compatible. This means that nodes or computers running the old software cannot validate blocks created under the new rules. It represents a radical change to a blockchain’s protocol, resulting in two independent blockchains and separate crypto assets going forward.
A famous example occurred in 2016 when Ethereum was hard forked to compensate investors in the DOA, which had been hacked by exploiting a vulnerability in its code. This resulted in a split that created the Ethereum and Ethereum Classic chains. Once the hard fork occurs, the two crypto assets are non-fungible with each other, sharing only the pre-fork transaction and ledger history. The new crypto asset is then airdropped to holders of the original crypto asset for no consideration.
A taxpayer that receives an airdropped crypto asset as a result of a hard fork receives a new crypto asset. Consequently, there is an amount, in cash or otherwise, that has been received by or accrued to the taxpayer. This amount would be equal to the market value of the new crypto asset received – the market value is determined based on the facts of the particular case. Another aspect that must be determined is whether the amount received is of a revenue or capital nature and therefore whether it must be included in gross income.
The cost of the new crypto asset also requires consideration. If acquired and held on capital account, paragraph 38 will not apply in relation to the new crypto asset, as it was not issued by a person, and no consideration was given by the taxpayer. The creation of the asset is also not a donation, because there is no person with an intention to benefit the taxpayer. Rather, the creation of the new asset is the automatic consequence of the hard fork, an external event. If the holder of the original crypto asset acquires and holds the new crypto asset as trading stock, section 22(4) would apply to deem the cost of the new crypto asset to be equal to its market value on the date it is received by or accrued to the holder.
After a hard fork, the holder of the original crypto asset still possesses that asset. Its market value may remain the same, increase, or decrease, but this is determined by factors beyond the holder’s control and is not considered consideration given by the holder. Therefore, the cost of the new crypto asset will be Rnil. From the holder’s perspective, receiving the new crypto asset as a result of the hard fork does not constitute a disposal of the original crypto asset. Consequently, the cost of the original crypto asset, still held by the holder after the hard fork, remains unaffected.
A soft fork can be viewed as a backward-compatible software update for a crypto asset blockchain. A soft fork does not result in a split of the blockchain and accordingly does not result in the creation of a new crypto asset. Therefore, generally, a soft fork does not generate a tax event.
The next article will discuss the requirements for donations tax, overall compliance and documentation used in the taxation of crypto assets.