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Mining or Proof-of-Work is the original consensus mechanism for blockchains, being used to validate transactions on a blockchain through the use of miners computing power. Miners are then rewarded through the blockchains native token of which transactions they are validating.
For Example: Bitcoin miners receive bitcoin as a reward for each block they validate.
Miners can be seen as providing a service, validating a blockchain, in return for cryptocurrency, which SARS will likely view as income. Unlike other income-generating protocols in the crypto-sphere, miners have business expenses relating to mining which they can use to offset any gains made.
Mining profitability is about balancing energy fees with block rewards.
With next to no official advice from SARS, the tax treatment of mining cryptocurrency falls into two brackets:
- Income tax when receiving the rewarded cryptocurrency
- Capital gains tax on any gains made on disposals
Lewis has been mining Bitcoin for the entire tax year, making a total of R50,000 in rewards. Having held the Bitcoin for the whole year, the crypto assets have appreciated to R75,000.
Firstly, Lewis will likely owe tax on the full R50,000 he received as his mining reward, seen as a trader by SARS.
Secondly, Lewis will pay tax on 40% of the entire R25,000 capital gain. He has none of his R40,000 personal allowance left to offset the gain.
Lewis incurred business expenses through mining which amounted to R5,000.
Lewis owes R8,100 in income tax: (R50,000-R5,000 * 18%)
Lewis also owes R1,800 for his capital gain: (R25,000 * 40% * 18%)
In total, Lewis owes a total of R9,900 in tax.