What's in a Name?: The Classification of 'Interest' on Crypto-assets in South Africa and Beyond

Decentralized finance (DeFi) represents a specific application of crypto-asset technology that has made significant advancements in adoption. While academic tax literature has focused on basic crypto-asset transactions, the tax consequences of DeFi transactions have been much less frequently explored. This study considers whether income or expenditure arising in specific DeFi transactions might be classified as interest in terms of South African income tax legislation as well as within the international tax context. Classification as interest has significant implications. Within South African domestic legislation, it impacts the determination of source, quantification of amounts, timing of recognition, application of exemptions, and imposition of withholding tax. Internationally, it has implications for the determination of jurisdictional taxing rights under double tax agreements. This study proposes that, while historically, interest may have been thought of exclusively as arising in the context of monetary debt, this is not a definitive characteristic of interest. Rather, interest represents remuneration for the provision of capital in the form of a loan principal with a contractual right to repayment. Whether each of these elements is present in the cases of the identified DeFi transactions is inconclusive. The study therefore recommends the provision of guidance to taxpayers by South Africa and other jurisdictions, and supports a coordinated approach among jurisdictions in the determination of income tax outcomes.