The rapid rise of crypto assets is forcing tax systems to ponder if rules designed for a traditional economy can keep pace with technologies that are redefining how value is created, owned and exchanged, Professor Shaun Parsons has told attendees at a University of Cape Town (UCT) inaugural lecture.
The lecture unpacked the complex and evolving relationship between crypto assets and taxation. Prof Parsons traced his own journey from being a chartered accountant to a tax academic before turning to the technological developments that have become a major focus of his research.
His interest in crypto asset taxation was shaped in part by his experience of the global financial crisis. Having moved to London to work in the financial sector, he witnessed the upheaval that followed the collapse of Lehman Brothers.
The crisis led to widespread disillusionment with the traditional banking system. It was in this context that the publication of the Bitcoin white paper proposed an alternative model based on cryptographic proof rather than reliance on a trusted third-party.
“That was also a significant event in the world of taxation,” Prof Parsons says, noting that crypto assets posed significant challenges to traditional tax systems.
Titled “Technology and challenges to tax norms in the 21st Century: Crypto assets and beyond”, his lecture examined questions that have confronted revenue authorities, policymakers, and taxpayers: Are crypto assets money? What constitutes a taxable event? How should crypto asset transactions be characterised? Which jurisdiction should have taxing rights? And, perhaps most importantly, how can taxation be enforced in a decentralised and pseudonymous environment?
Dean of the Faculty of Commerce, Professor Suki Goodman, described Prof Parsons as “kind, thoughtful, modest and trustworthy,” and as “a wonderful example of the kind of academic we value at UCT.”
Prof Goodman explains that traditional banking relies on a trusted intermediary, such as a bank, to maintain a central record of transactions and balances. By contrast, crypto asset systems rely on decentralised networks in which transactions are validated and recorded on a blockchain.
This fundamental difference creates a series of challenges for tax authorities.
One of the most difficult questions asked is when a crypto asset transaction becomes taxable.
Prof Parsons used crypto asset mining as an example, exploring whether rewards received by miners should be regarded as self-created assets, found property, a form of gambling, or compensation for services.
Most jurisdictions have settled on treating transaction validation as a service, meaning that rewards can constitute taxable revenue upon receipt. South Africa’s position similarly treats mining rewards as revenue upon receipt.
But the lack of international uniformity illustrates a broader problem: technology has developed faster than the concepts underpinning many tax systems.
Tax law meets a new financial vocabulary
Prof Parsons also examined the challenge of characterising transactions involving crypto assets.
In tax law, classification matters. Whether an amount is characterised as business profits, interest, royalties, dividends, or another form of income can determine not only how it is taxed domestically, but also which country has the right to tax it when transactions cross borders.
This becomes particularly complex in decentralised finance, or DeFi, where blockchain-based systems replicate traditional financial products through smart contracts. For example, a payment to someone who lends crypto assets may appear to be interest. But should it legally be treated as interest when the underlying asset is not fiat currency?
For Prof Parsons, these questions demonstrate the limitations of applying category definitions developed for an earlier economic era to transactions that could never have contemplated at that time. “We have created characterisation without contemplation of these types of transactions,” he says.
Prof Parsons identified several developments that could further test existing tax frameworks.
Among them are the growing use of stablecoins, crypto assets designed to maintain a value pegged to fiat currencies; central bank digital currencies; and the broader tokenisation of assets, in which blockchain technology can enable fractional ownership of assets such as property.
Tokenisation, he suggested, could create particularly difficult questions for international taxation. If a token represents fractional ownership of an immovable property, should its sale be treated as a property transaction and taxed where the property is located, or as the sale of a crypto asset, potentially shifting taxing rights to the seller’s country of residence?
Keeping developing countries in the conversation
Prof Parsons says the academic tax community has an important role to play as governments grapple with these changes. That role includes ensuring that emerging debates remain grounded in defensible principles of tax policy, while also ensuring that the interests of developing countries are not overlooked.
“We should ensure that our voice moves the debate towards greater inter-nation equity,” he says.
His lecture positioned the rapidly changing digital economy as part of a much larger question about fairness, sovereignty, and the future ability of countries to raise revenue.