In the USA, Rule 2019–24 provides that when the fork results in the creation of a new crypto asset, which is referred to as the taxpayer’s e-wallet, then the event results in taxable income, provided the taxpayer can transfer, sell or exchange the crypto asset (IRS 2019b). Such abilities represent evidence of the ‘accession to wealth’ of the taxpayer recognised in USA tax law (Landoni & Pieters 2019). The income is equivalent to the market value of the crypto asset when it is received (IRS 2019b).

In the UK, the HMRC refers only to the application of the Capital Gains Tax Act in both its guidance to individuals and businesses. The capital gain (or loss) arises only on the disposal of the new crypto asset. The allocation of the cost of the pre-existing crypto asset between the pre-existing and new crypto asset for capital gains is derived from the cost of the pre-existing crypto asset and the values of the two crypto assets at the date of the fork (HMRC 2018a, 2019). Presumably, the subsequent use of a crypto asset received in a hard fork as trading stock would not preclude it giving rise to revenue income arising on disposal merely by virtue of the means of acquisition, although this is not stated by HMRC.

The ATO considers that a hard fork gives rise to CGT for taxpayers who hold the pre-existing and new crypto asset for investment purposes. It treats the new crypto assets as trading stock for businesses where it is held for sale or exchange in the ordinary course of business (ATO 2020). Although no explicit reference is made to the timing of recognition of revenue income, by implication this will give rise to revenue income at the earlier of the disposal dates, or at year end, since Australia recognises unrealised increases in trading stock value as income (ATO 2022a). The cost of the new crypto asset to be recognised in the hard fork is zero (ATO 2020).

In recommending an income tax consequence of a hard fork for SA taxpayers, the guidance issued by the three other tax authorities was considered. The IRS treats any income arising from a hard fork as revenue for the taxpayer, the ATO indicates that a hard fork may give rise to either a capital receipt on disposal or revenue income if held as trading stock, and HMRC only contemplates a capital gain or loss.

The taxpayer bears the burden of proving that income is not revenue in nature (s102; Tax Administration Act 2011). The mere fact that a profit has resulted from a transaction is insufficient to make that profit revenue in nature; rather, it must be the product of ‘an operation of business in carrying out a scheme for profit-making’ (Commissioner for Inland Revenue v Stott 1928 [3], SATC 253 [A], p. 259). The intention of the taxpayer plays a vital role in determining whether income is capital or revenue in nature (Commissioner for Inland Revenue v Stott 1928 [3], SATC 253 [A]). The taxpayer’s intention will be determined by taking into account their stated intention (or ipse dixit) together with the surrounding facts in each specific case (Malan v Kommissaris van Binnelandse Inkomste 1983, 45 SATC 59). The taxpayer’s intention in acquiring the asset will be decisive unless other factors show that it was sold as part of a scheme of profit-making (Commissioner for Inland Revenue v Stott 1928 (3), SATC 253 (A). It is, however, possible that taxpayers may, subsequent to acquiring a capital asset, change their intention and enter into a scheme of profit-making involving the disposal of that asset, in which case the resultant income will be revenue in nature (Natal Estates Limited v Secretary for Inland Revenue 1975, 37 SATC 193).

Proving a capital intention with respect to crypto assets may be challenging since crypto assets do not yield any fruit, such as dividends or interest, as do other long-term investments; the yield is in the appreciation of the market value of the crypto asset. However, SA has a history of comparable cases dealing with long-term holdings of appreciating assets. In Commissioner for Inland Revenue vs Nel 1997, 59 SATC 349, even though the taxpayer acquired Kruger Rands (that is, gold coins) for their value appreciation, the court concluded that, as they were held for a long period and disposed of for a purpose other than profit-making, the proceeds on disposal were capital in nature. On the other hand, Commissioner for Inland Revenue vs Nussbaum 1996, 58 SATC 283, concluded that the taxpayer who frequently and profitably disposed of investments was, in fact, pursuing a secondary profit-making scheme. Thus, the length of time held and the reasons for disposal, as well as the frequency and profitability thereof, would assist in determining whether the disposal of crypto assets is tantamount to a profit-making scheme.

A taxpayer benefits from a hard fork through the receipt of new crypto assets as a result of being a holder of the pre-existing crypto asset. Therefore, it is submitted that the taxpayer’s intention at acquisition for the new crypto asset might be imputed from the intention with which the pre-existing crypto asset was held. Consideration might also be given to whether any activities undertaken by the taxpayer to benefit from the hard fork amounted to a scheme of profit-making.

The SARS guidelines indicate that mining will give rise to revenue income, and do not contemplate the possibility of non-trade mining activities. This is consistent with the approach of the IRS and HMRC (which includes non-trade mining income as miscellaneous income rather than a capital receipt). Crypto assets received in mining will be held as trading stock until it is sold or exchanged. Therefore, if crypto assets obtained in mining, subsequently give rise to the receipt of new crypto assets through a hard fork, such additional crypt assets might also be initially regarded as revenue in nature (if revenue is recognised on receipt in this instance).

Recognition of revenue income may occur either initially on receipt of the new crypto asset, with a subsequent inclusion of the incremental profit upon disposal, or only upon disposal. Since the US concept of ‘accession to wealth’ is not explicitly recognised within the Act or SA case law, and since the Australian requirement to mark trading stock to market is not present in South Africa, there may be justification for recognising revenue income only on disposal. Furthermore, no trading activity or reliable market values may exist on the date of the hard fork, making any recognition of revenue on receipt difficult to quantify. However, recognition at receipt or accrual seems to most closely align with the definition of gross income in the Act. It will therefore be important for SARS to address the timing of revenue recognition in this context.

If the new crypto asset is revenue in nature and such revenue is recognised upon receipt, the value will be included in the taxpayer’s trading stock in terms of section 22(4) of the Act at its current market value upon receipt (Income Tax Act 1962). This trading stock amount will be equal to the amount included in income on that date. This is consistent with the conclusion of Basson (2020) in her analysis of the income tax consequences of mining activities. Since a crypto asset is defined in section 1 of the Act as a ‘financial instrument’, no unrealised impairment loss may be recognised at year end. This designation, notwithstanding, income on disposal, cannot be treated as capital in nature merely due to the length of time held, since section 9C applies only to equity shares and not to all financial instruments (Income Tax Act 1962).

Alternatively, if the taxpayer is able to discharge the burden of proving that the crypto asset received, represents a capital asset, the proceeds on disposal will be taken into account in the determination of a capital gain. The proceeds will be valued at either the amount of fiat currency received or at the market value of the non-monetary proceeds received, in accordance with the barter transaction rules referred to by SARS in addressing other crypto asset transactions. It should also be noted that the possibility of crypto asset transactions falling within personal-use asset exclusions from CGT, as contemplated in Australia, is precluded by their inclusion within the definition of financial instruments in the Act in 2019 (Basson 2020).

Paragraph 20 of the Eighth Schedule to the Act stipulates that the base cost of a capital asset consists of the actual expenditure incurred in the acquisition of the asset, including the allowable expenditure directly incurred in the acquisition and disposal of the asset (Income Tax Act 1962). The new crypto asset is received by the taxpayer for no consideration, while the pre-existing crypto asset continues to be held. However, the taxpayer may incur expenditure for the negligible fees incurred on either receipt or disposal of the new crypto asset. Therefore, it is proposed in this study that these costs should be the only amounts on which the base cost is determined and that no portion of the cost of the pre-existing crypto asset be assigned to the new crypto asset received. This would conceptually align with the treatment of shares received for no consideration in section 40C of the Act, which stipulates that when a taxpayer acquires shares, share options or other rights by virtue of their existing shareholding, the cost of acquisition should be deemed to have a nil value of actual expenditure incurred (Income Tax Act 1962).

Crypto assets in both a hard fork and an airdrop are received for no consideration. However, an airdrop is typically an active distribution by a promoter of a crypto asset, rather than a by-product of events on the blockchain (OECD 2020).

The HMRC and ATO have addressed the income tax consequences of airdrops in their jurisdictions. The IRS has not specifically addressed airdrops related to marketing or advertising campaigns, but only those related to hard forks (which were considered in the preceding analysis of hard forks).

The ATO guidelines provide that an airdrop of crypto assets, received in a taxpayer’s digital wallet or e-wallet as part of a marketing or advertising campaign, is treated as ordinary income at the fair value of the crypto assets at the time of receipt. The ATO has, however, expanded its guidance to indicate that airdrops that represent the first distribution of a new crypto asset do not give rise to tax consequences on receipt, because they do not yet have a market value as they are not actively traded (ATO 2022b). Either the trading stock rules (for business activities) or CGT rules apply to the subsequent disposal of the airdropped crypto assets (ATO 2020).

If the taxpayer receives an airdrop of crypto assets in their personal capacity without assuming any corresponding obligation, HMRC advises that it will not be taxable at the time of receipt. Where crypto assets are received in exchange for services, or other performance obligations from the taxpayer, the airdrop will be included in either the taxpayer’s other income, or receipts from trade. On disposal, the proceeds from the disposal of the airdropped crypto assets will be considered capital in nature. However, if the airdropped crypto assets form part of the taxpayer’s business activities, the income tax rules will take preference over capital gains (HMRC 2018b).

The ATO treats all receipts as revenue in nature, while HMRC treats only those received in return for some reciprocal action as revenue. This inclusion by HMRC would seem to address a concern that a payment might be incorrectly referred to as an airdrop, while a ‘true’ airdrop is gratuitous. The income from subsequent disposal of the airdropped crypto assets is treated similarly in both jurisdictions, namely as capital for investors or revenue for businesses.

In determining the income tax consequences of an airdrop for SA taxpayers the proposed tax treatment of hard forks was considered, because in both cases, the taxpayer involuntarily receives new crypto assets at no personal cost. As with hard forks, an airdrop increases a taxpayer’s wealth. Here too, the taxpayer will have to prove that the receipt of the new crypto assets is of a capital nature, failing which the income arising will be considered revenue in nature. It is submitted that this would likely require that the receipt of crypto assets be fortuitous rather than ‘designedly sought for and worked for’ (see Commissioner for Inland Revenue vs Pick ‘n Pay Employee Share Purchase Trust 1992, ZASCA 84, p. 280), and might be informed by the extent and nature of the taxpayer’s collective crypto asset activities. Likewise, the taxpayer’s intention, subsequent to acquisition, and the possibility of a change in intention to a scheme of profit-making, or vice versa, would also need to be considered in determining the nature of the income arising on subsequent disposal.

The ATO and HMRC consider that taxation first occurs, either upon receipt (if revenue), or only upon disposal (if capital). If such an approach is adopted in SA, airdropped crypto assets of a revenue nature will be taxable at the earlier of accrual or receipt date to the taxpayer, in terms of the gross income definition in section 1 of the Act. Upon receipt of the crypto asset, the taxpayer will add its value to their trading stock and any subsequent change in value will be realised upon disposal in terms of the trading stock rules of section 22 of the Act (Income Tax Act 1962). Alternatively, the lack of an observable market value on receipt may make it more pragmatic to recognise income only on disposal (as is the case in Australia with respect to initial distributions). Again, guidance from SARS on the timing of recognition that it considers appropriate, is therefore important.

By contrast, taxpayers whose new crypto assets are capital in nature will have no inclusion in taxable income upon receipt, while a capital gain will only arise upon disposal. Such crypto assets will have a base cost of nil since no cost is incurred by the taxpayer.

According to the IRS, donating crypto assets to a charitable organisation will not be considered as ordinary income, or a capital gain or loss, as such transactions are exempt from tax. The value of the available charitable contribution deduction is based on the period for which the crypto asset was held. For crypto assets held for longer than a year, the value is the market value of the crypto assets on the donation date. When the crypto assets are held for less than a year, the deduction is the lesser of either the market value of the crypto assets on the date of the donation, or their cost (IRS 2019a). Charitable contributions are only deductible to the extent that the taxpayer does not receive a benefit in return (IRS 2022), and this limitation would presumably extend to the exemption as well. Guidance has not been specifically provided by the IRS for non-charitable donations.

In the UK, charitable donations do not attract capital gains for individuals or corporation tax for businesses, unless they are ‘tainted’ (when the taxpayer enters into an arrangement to obtain financial advantage from a charity after making a donation) or represent an attempt to realise a gain from the disposal (HMRC 2018b, 2020). In contexts other than donations to charities, the HMRC guidance provides that a disposal of crypto assets in the form of a donation to a person other than a spouse or civil partner will attract CGT (HMRC 2018b). For a company, the donation of crypto assets, other than to a member of the same group of companies, will attract corporation tax. The value of the donation for the corporation tax calculation will be the value of the crypto assets at the time of the donation (HMRC 2019).

In the ATO guidance, the donation of crypto assets is treated as a disposal of crypto assets and, as such, will give rise to revenue income when held as trading stock, and capital disposal in other instances. The value of the donation will be the market value of the crypto assets in the calculation of the capital gains, or the application of trading stock rules (ATO 2020). The ATO does not specifically consider the deductibility of donations made in crypto assets.

There is consensus in the IRS, HMRC and ATO guidelines that donations will give rise to either a capital or revenue disposal. The IRS and HMRC explicitly consider the availability of exemptions with respect to donations to charities.

South African taxpayers are entitled to a limited deduction for donations made to public benefit organisations (PBOs) in terms of section 18A of the Act. In terms of section 22(8)(C) of the Act, the donation to a PBO of crypto assets held as trading stock will be deemed to be disposed of at an amount equivalent to the taxpayer’s section 11(a) or section 22(1) deduction. This amount will be available for the allowable deduction in terms of section 18A. An investor will disregard the capital gains or losses for any donation made to a PBO, in terms of paragraph 62 of the Eighth Schedule to the Act, and will be entitled to a deduction of the cost of any crypto assets donated to a qualifying charity, limited to 10% of the taxpayer’s taxable income before such deduction (Income Tax Act 1962).

For any other donation made, the normal trading stock rules or CGT consequences will apply. The cost of any crypto assets purchased as trading stock, or the value of any crypto asset giving rise to revenue on receipt, will be added to the taxpayer’s cost of trading stock on acquisition. In terms of section 22(8)(b) read with section 22(8)(B) of the Act, crypto assets held as trading stock will be deemed to be disposed of at an amount equal to the market value of the crypto assets at the time of the donation to a non-PBO (Income Tax Act 1962).

The investor taxpayer’s capital gain or loss on the donation to any person other than to a PBO (or to other parties qualifying for exemption, such as between spouses), will be determined in terms of paragraph 38 of the Eighth Schedule to the Act. This states that the donation made will constitute a disposal with a value equivalent to the asset’s market value on the date of the donation (Income Tax Act 1962).

Determining the income tax consequences for ICOs is complex, considering the unique characteristics of crypto assets, coupled with the fact that there are no formal guidelines available from the benchmarked authorities regarding the income tax consequences of an ICO on those jurisdictions. Unlike other financial instruments defined in section 1 of the Act, crypto assets do not provide the crypto asset holder with a residual right to the equity of a company or any rights to dividends. In an ICO, the issuer offers crypto asset tokens that the purchaser hopes will be accepted in the future by someone other than the issuer. Thus, the crypto asset purchaser has no ownership interest in or future claim against the issuer (OECD 2019). An ICO is therefore distinguishable from the initial public offering (IPO) of shares, from which its name is derived.

The SA taxpayer must include in gross income the total amount received by, or accrued to the taxpayer, in cash or otherwise, during the year of assessment, excluding receipts or accruals of a capital nature (Income Tax Act 1962). The issuer in an ICO sells the new crypto assets for fiat currency (cash) or in exchange for other crypto assets. Thus, the consideration accrues to, or is received by, the taxpayer issuing the crypto asset on the date of the ICO issue. Furthermore, when an ICO occurs for the benefit of the issuer with no future obligation to the crypto asset holder, it is submitted that the income arising is ‘designedly sought for and worked for’ rather than fortuitous, and therefore not capital in nature (see Commissioner for Inland Revenue vs Pick ‘n Pay Employee Share Purchase Trust 1992, ZASCA 84, p. 280). Therefore, in the absence of any further obligation by the issuer to the holder, it is submitted that the proceeds of an ICO represent gross income for the issuer upon receipt or accrual.

For the purchaser, the cost of acquisition represents either a deductible expense, if acquired as trading stock, or the base cost of the crypt asset in other cases.

The IRS does not address loss or theft, while the position of His Majesty’s Revenue and Customs (HMRC) differs from that of the ATO. HMRC does not consider loss or theft to be a disposal, and therefore no income tax consequences arise. In contrast, the ATO accepts loss or theft as a disposal of no value, if the crypto asset, the wallet in which it was stored, or the access key, cannot be replaced or recovered. The taxpayer will be required to provide supporting evidence such as the cost of the crypto assets lost and the details of when they were acquired and lost.

In terms of SA tax legislation, the issue at hand would be whether a disposal has taken place. Paragraph 11 of the Eighth Schedule to the Act provides a definition of ‘disposal’, which includes ‘the sale, donation, expropriation, conversion, grant, cession, or any other alienation or transfer of ownership of an asset’, and goes on to include such events as ‘forfeiture, termination, …, cancellation, surrender, …, abandonment, …, scrapping, loss or destruction’ (Income Tax Act 1962). Such a definition would accommodate involuntary disposals such as loss or theft. However, it would be necessary to demonstrate that a true alienation, or loss, of ownership had occurred. This may more readily be accepted in the case of stolen crypto assets or lost computer hardware than in the case of the loss of a password. There is no obvious parallel in this context in the literature of which the authors are aware. Here too, the taxpayer would benefit from guidance from SARS in this respect.