Abstract
There has been an increase in crypto asset adoption worldwide including in South Africa. Crypto assets are digital or virtual currencies that function on the blockchain technology, which is a distributed, decentralised open ledger that relies on cryptography. The crypto environment is a rapidly evolving technology with its own unique characteristics and specific nature of events. One such event is a hard fork, which is when an underlying crypto assets blockchain undergoes a major software change, resulting in a split of the blockchain. This results in the holder of the underlying crypto asset receiving free new crypto assets from the newly created blockchain by merely holding that underlying crypto asset. This free new crypto asset is therefore an increase in a crypto holders wealth, which raises the question on how a hard fork should be taxed. The most famous hard fork was the Bitcoin hard fork that occurred in 2017 whereby holders of Bitcoin received the new Bitcoin Cash at a ratio of one Bitcoin Cash to one Bitcoin.
Currently South Africa does not have any specific tax legislation on crypto asset hard forks, nor is there any interpretation notes or guides in relation to this. Other international jurisdictions have provided specific tax guidance and laws on crypto asset hard forks. This qualitative research uses a doctrinal approach to conclude on the tax implications of crypto asset hard forks in a South African context. This is performed through a literature review, deriving guidance from how other analogous events and tax laws could apply to hard forks, conducting a comparative analysis on how other international jurisdictions will tax hard forks, and lastly an application of the gross income definition to crypto asset hard forks.
The research highlights the difference in views and tax treatments of hard forks among scholars and various countries. Other analogous events such as share dividends and corporate unbundlings, although similar in nature, cannot be applied to hard forks since crypto assets are not shares. Tax treatments among different international jurisdictions vary from an immediate taxation of the newly received crypto asset, no taxable event upon the hard fork, which is rather deferred until its subsequent disposal or a combination thereof. Based on applying the gross income definition and relevant case laws, this dissertation concludes that new crypto assets received/accrued from a hard fork is a
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fortuitous receipt/accrual of a capital nature. Resultingly, a hard fork is not a taxable event and the initial tax value of the new crypto assets is nil, since it has been received for free without any consideration paid in return. The new crypto assets will be subject to gross income or capital gains tax upon its subsequent disposal.
Keywords:
Crypto asset; Bitcoin; Bitcoin Cash; Hard fork; Blockchain; Tax implications; Taxable event; Gross income.