Despite the outward appearance of an airdrop as "free money", the inescapable conclusion is that the tax implications are very complex and sensitive to unclear legal technicalities. The results of this research challenge this position as being wrong – the tax effects are not only understood by taxpayers, they violate the principle of neutrality (as prisoners and non-custodial persons should attract the same tax incidence) and no certainty is provided by the tax authorities regarding airdrops .
Historical Context
The Bitcoin Paradigm and Emergent Technology
Rationale for the Research
Given the value proposition these projects represent for early adopters, a proactive approach in examining the tax consequences is advisable to determine whether the South African tax legislation, and the legal environment in which it operates, is prepared for all the possible nuances, permutations and schemes. on which these air droplets can be placed.
Research Objectives
Primary research objective
This research aims to address the following broad issue: is the South African tax environment characterized by simplicity through certainty in how airdrops would be taxed. Otherwise, the legislation should set out specific rules to ensure that compliance levels and revenue collections are not degraded through a legal framework that cannot be easily understood and applied by the average person.
Secondary research objective
Research Methodology
The aim of this analysis is to determine whether a strict approach in terms of the legal framework necessarily leads to the best economic result. Finally, we will discuss these established views in the context of two real-world case studies – see Section 1.6 below.
Case Studies
Flare Networks - Spark
The right of ownership is immediately vested through what is claimed to be appropriation (occupatio);23 such that 25 billion becomes the property of Flare Networks Limited ("FlareCo"), and 30 billion the property of the Flare Foundation; both are presumed to have acceded to ownership.24. The remaining 45 billion also belong to the addresses noted in Snapshot in the form of a fixed formula (linked to the number of XRP held on Snapshot), to the extent that their owners have indicated that they take ownership by appropriation via the metadata field above.
Flare Networks - Songbird
Summative Statement
Recommendations that might come out of these discussions would then be made based on the financial analysis done.
Overview
SARS Guidelines
By definition, an airdrop is not a quid pro quo, but results from some positive externality.31 However, the question inspired by Lord Wrenbury's statement is:32 if there is an entry, is there [gross] income. On the surface, an airdrop is a 'gift', yet there's no obvious reason why it can't be essential to a profitable trade.
US IRS Guidelines
This presupposes a self-sustaining arrangement and is important in contrast to cases where an airdrop is received by a PCE. Finally, it is unclear what the tax treatment is, where technologically there is no hard fork.
HMRC Guidelines
However, this guidance does not address cases where the ownership of the inherited asset is one of several factors that cause flight to take place. Where a taxpayer's interests in an independently created blockchain cryptocurrency are contingent upon their ownership of an existing one, this guidance does not appear to apply.
Summative Statement
Cryptocurrency
Gross Income
The State's sphere of influence under Article 1 of the Convention on International Civil Aviation has established South African sovereignty over its airspace,43 and Article 1 of the Space Affairs Act 84 of 1993 extends this even further.44 The definition 'computer system' is made dependent on the definition of 'computer', both defined terms in Article 1 of the Cyber Act.
Decentralised autonomous organisations
- Validity of the offer
- Acceptance
- Novel legislation in the US
- Summative statement
Therefore, it is important to consider the subject of the offer as a functional crypto asset in a living ecosystem. At launch, Mainnet as a provider offers XRP holders offers in terms of snapshot.
Stipulatio Alteri
Given how distributed ledger platforms generally work, recognizing a DAO as a legal entity for income tax purposes would provide significant clarity to the tax system when considering airdrops from a newly created network. Although this appears to be on acceptance of the offer by the promisors, to the extent that no time is fixed in the terms, the acceptance must be within a reasonable time, which becomes a question of law.
Summative Statement
All obligations related to the benefits must be assumed by C when he accepts the benefit, otherwise it is not a valid acceptance. From the point of view of the definition of gross income under Article 1 of the Act, the next chapter further develops the legal framework by examining the concept of 'non-capital nature' and then the core elements of the definition.
Preamble
Capital as an Economic and Legal Concept
Moreover, this case also made it clear that an asset can be capital in the hands of one person, but income in the hands of another.72. It is therefore necessary to make a distinction; Of the various instruments developed by the court, the intention test has turned out to be the preferred alternative.
Intention
- Original Intention
- Change of Intention
- Mixed Intention
- Summative Statement
The taxpayer's "ipse dixit" is conclusive, "in the absence of any other factors that would indicate that the taxpayer participated in a profit-making scheme..."78. This is in accordance with section 102 of the Taxation Administration Act 28 of 2011 (“TAA”)96 as it essentially creates a rebuttable presumption as to the purpose of the income.97.
Case Analysis – Pick ‘n Pay case
The dominant purpose in the trust's case was to act as a link between employees and the listed stock market and not to carry on business. A profit motive, although compelling, is not necessarily required in light of the view that the benefit of trade does not derive solely from a profit derived from it.
Case Analysis – the Wyner case
The question before the court was therefore whether this amounted to the operation of a profit-making scheme. Notwithstanding these highlighted inconsistencies, the Supreme Court of Appeal contradicted itself on this point, so that the correctness of the test set out in Pick 'n Pay is called into question.
Case Law Regarding Fortuitous Gains
Although he did not specifically link this to the Wyner case, the author writes with apparent approval of the court's finding that the pursuit of profit as the primary motive in a case where taxpayers are forced to act by circumstances is questionable.136 Comparatively, the immediate threat of vagrancy is likely the source of coercion, coercive action. Fortunately, when deciding between an objective or subjective approach in CSARS v Capstone 556 (Pty) Ltd, the court supported the subjective approach in Pick 'n Pay.137 Moreover, the court held that in cases involving detailed business arrangements,138 .
Summative Statement
In CIR v Strathmore Exploration and Management Ltd,141 it was found that certain shares were taken at random – in this case with a face value of 5s, not the market value of more than £1 – but were then sold in a profit-making scheme by the taxpayer necessarily qualified the income as income, regardless of the fact that it was allegedly obtained with capital.
Preamble
Accrued to, or received by
Spiro relates that there did not appear to be clear acceptance of the Lategan ruling in subsequent Appellate Division cases.153. However, this latter part was nullified by a later issued proviso to the gross income definition in s 1 of the Act.
Total amount in cash, or otherwise
First, for an amount to exist for purposes of determining gross income, it must have a 'verifiable monetary value' and must not be fictitious. The case before the court arose because the appellant company received as consideration for the sale of certain mining rights 1,000,000 shares of East Rand Mines Limited - J.S.E. On appeal it was necessary to determine whether the Transvaal Land Division had correctly upheld the finding of the Special Income Tax Appeals Tribunal that:174. a).
Summative Statement
In terms of the principles of receipt and accrual, the Treasury would be in a position that they would be forced to tax in the accrual (low price) phase, while what a taxpayer might receive over the distribution period would be a significant value growth can mean. Using actual pricing data from these three projects, an airdrop was simulated in terms of the following parameters: Without any investment returns, it is a mathematical certainty that taxpayers would be indifferent to either method with respect to the face value of their asset portfolios at the end of the observation period, ceteris paribus.
Preamble
Airdrops as Compensation
It is argued that the FLR distribution is not a pure donation, lacking the essential elements required of Zyl in the Marx case, and the common law. To the extent that the recipient of the airdrop created the reasonable belief in the mind of the opposing party (which. This may require a court to consider the knowledge and expertise of the taxpayer.
Taxpayer reactions to airdrops
- Preamble
- Opportunists
- Hodlers
- Summative statement
In cases where an option is exercised with the intention of selling the underlying asset, courts have historically taken into account the nature of the proceeds. As mentioned, it is not the taxpayer who seeks the airdrop right of his own design, but the design of the provider that the right is granted to him. Nevertheless, nothing precludes the air-dropped assets received under lucrative title from becoming part of the taxpayer's trading stock.
Airdrops, and the accrual-receipt principles
- Preamble
- Spark and custodial holders
- Spark and non-custodial holders
- Songbird – a community in discord
- Summative Statement
This does not affect the accrual of the amount, as is clearly stated in the case law. Analysis of accretion in the case of the FLR non-conserving distribution is more complex. Electronically communicated acceptances in terms of the ECT Act will be specifically subject to the Reception Theory.
Valuation methods
There is no immediate practical solution, moreover, it is an area of concern for the effective operation of the tax system for individuals. In practice, SARS will fulfill their onus in terms of the Butcher Bros case by referring to the market price on the day,266 but a taxpayer can use the principles of Lace Proprietary Mines to challenge such a draconian approach. It is calculated by multiplying the quotient of standard deviations of the base asset by the index with the correlation coefficient of returns.
Summative statement
However, the binary practice of the crypto-asset space in relation to custodianship has resulted in significant differences in results. Van Zyl, R. 'The Origin and Development of Stipulatio Alteri v. Sound Description in Contemporary South African Law Journal for Contemporary Roman-Dutch Law. Griessel, R “The Nature of Proceeds from the Sale of an Asset for Income Tax Purposes” South African Commercial Law Journal Erwin Spiro “Receipts or Basis of South African Income Tax”.
GK Goldswain 'A Purposive Approach to Tax Law Interpretation - Winds of Change Meditari. Reinhard Rudd 'The Tax Treatment of Interest in Kind: The Brummeria Case Revisited South African Mercantile Law Journal.
