In order to foster economic recovery and development there is need to have serious players and embrace innovation. Without ignoring the fact that not every innovation is beneficial to the growth of the economy, there is need to embrace it with caution. An outright technophobia is however an impediment to growth. With the prevailing liquidity crisis, some traders have resorted to virtual currencies to facilitate payments. This piece of writing is targeted at unfolding the mystic persona of cryptocurrency including the tax effect in Zimbabwe thereof.
A cryptocurrency is a digital virtual currency that uses very strong cryptography for security. A cryptograph is a sort of coded message. Cryptocurrency is thus difficult to counterfeit because of this security feature. The security features are not hack proof, consequently there are risks associated with trading in this currency which are worth knowing about. Cryptocurrency advocates canvass the use of this currency because of its anonymity, but we consider this feature to be a con and not necessarily a pro. The anonymity nature of the transactions makes the trade a haven for criminal activity such as money laundering and tax evasion. Due to the fact that cryptocurrency is virtual and does not have a central repository or storage, its digital balance could easily be wiped out by a computer crash if the backup copy of the holdings does not exist. There has been a lot of scepticism with this form of currency in many jurisdictions. The legal status of cryptocurrency is at variance from one country to the other. Others have legitimized the use and trade in cryptocurrency whilst others have banned or restricted its use. For those that have allowed or legitimized the currency, they have classified it differently in their jurisdiction for example as property or financial instruments. Others have banned the handling of cryptocurrency by financial institutions whist others have only illegalised the currency in respect of buying goods.
Arguably, the most appealing feature of cryptocurrency is that it is not issued by any central authority, rendering it in theory immune to government interference or manipulation. The most popular crypto currency is Bitcoin which was launched in 2009. There were over 17 million bitcoins in circulation, which have a total market value of over $US 140 billion as at May 2018.The benefits of cryptocurrency include but are not limited to: making it easier to transfer funds between parties in a transaction; minimal processing fees in transfer of funds in comparison to most financial institutions for wire transfers. For a nation like Zimbabwe, this is a sensible alternative method of payment for imports given the scarcity of foreign currency. Like any online technology, the obvious drawback is the risk of hacking.
In Zimbabwe, the Reserve Bank of Zimbabwe (RBZ) banned all financial institutions from accepting cryptocurrency as collateral, opening accounts of exchanges dealing with cryptocurrency; transfer or receipt of money in relation to purchase or sale of virtual currencies. From a tax perspective, it is a very prudent move by RBZ. The legal framework governing the collection of revenue in the trade of virtual currencies has not been set up yet. The anonymity nature of the transactions makes traders out of reach from the taxman. This is a particularly dangerous position for the fiscus because there is no way of keeping track of the transactions performed. The only way in which the taxman can know about how much income a taxpayer has made from the trade in virtual currencies is through full disclosure by the taxpayer. The major strength or allure of the virtual currency is the anonymity nature of the transaction.
Although the move by the RBZ was a sensible one, it was done hurriedly without proper thought of the legal consequences of the action. At the face of it, the RBZ had violated the administrative principle of audi alterem partem which places a responsibility on the Authority to listen to both sides of the story before passing on law. It could be that they wanted to buy time to allow them to formulate policy to govern the trade in cryptocurrency. The Reserve Bank simply had no law to stand on regarding the ban. The ban was just imposed without following proper administrative procedure. The void in the law regarding cryptocurrency leaves the country exposed to the vagaries of tax evasion and the consequent loss of revenue. It is critical for the legislature to quickly make law that either governs the trade or bans the trade in cryptocurrency.
There is a general lack of understanding of this virtual currency amongst many people, the world over. It can be deduced that the stance taken by the central bank is that of caution. In the United States of America, an arguably leading economy in the world, through its revenue authority, the Internal Revenue Service (IRS) ruled that virtual currency would be treated as property for tax purposes. This means that virtual currency would be subject to capital gains tax. Perhaps, Zimbabwe could pick a leaf from the way the Americans handle the virtual currency.
Our legislature must see this as an opportunity to collect revenue, perhaps by learning more of the currency and the technology, and then formulate a policy that is in tandem with the prevailing economic conditions of Zimbabwe. This obviously takes time as this is not a well understood trade and technology. There must however be a balance between open mindedness and caution given the high risk of scammers that roam the internet jungle on a daily basis.