Over the past decade, Bitcoin and cryptocurrency, in general, has risen from obscurity to global mainstream prominence. It has only been during the past couple of years that the New Zealand Inland Revenue Department (also known as the IRD) has started publicly taking notice.
Early adopters have made large sums of money, and with the exciting growth trajectory that crypto is poised to follow, it is likely that many more Kiwis will also benefit from owning bitcoin and other digital assets.
This brings us to the question of taxes. If you have made money from cryptocurrency, then you need to pay tax. Unfortunately, there is no legal way of escaping this fact.
“In this world, nothing can be said to be certain, except death and taxes.” – Benjamin Franklin
Meanwhile in the waiting room to the afterlife – Source
The following discourse explores our current tax legislation where it relates to bitcoin and other cryptocurrencies. We take a deeper look at how bitcoin is treated in the eyes of tax law and what you need to know in order to remain compliant.
As a final bonus, we have also included a quick interview with a taxation expert – Helen Carbery, Chartered Accountant. During this interview, we discuss ways that bitcoin owners and investors can reduce their tax bill whilst keeping within the parameters of New Zealand tax law.
Tax treatment of cryptocurrency in New Zealand
“Cryptocurrency is treated as property for tax purposes. There are no special tax rules for cryptocurrencies – ordinary tax rules apply.” – Inland Revenue Department
Since Bitcoin does not provide an income, the IRD assumes that in most cases, it is purchased with the intention of ‘disposal’ at a later date. Unless you can prove beyond reasonable doubt that you purchased bitcoin with no intention for future sale or disposal, then the sale of your bitcoin will be treated as a taxable event. We discuss this in more detail in the next section.
If you own foreign fiat currency at the end of a financial year, you are required to disclose and pay tax on any unrealized gains – this rule does not apply to crypto. Due to the fact that cryptocurrency is treated as property for taxation purposes, foreign currency gain or loss provisions do not apply. In short, this basically means that your tax liability is determined when you sell or otherwise dispose of cryptocurrency.
If you sell cryptocurrency at a loss, this can also be claimed against taxable income to reduce the total amount of tax that you owe. For people who are employed under a PAYE-type arrangement, crypto-losses might even result in potential tax returns.
How are the proceeds from the sale of gold bullion taxed and why does this matter?
The IRD have published a cryptocurrency Q&A section on their website to help people understand more about the taxes they owe. In response to a question about whether long term holders of crypto will be taxed when they sell, the IRD states that:
“For income tax purposes, cryptocurrencies also have similar characteristics to gold bullion. We recently published a paper setting out when proceeds from the sale of gold bullion count as income, which may be of assistance.”
Let’s take a look at some of the main points discussed in this analysis paper…
The key question surrounding whether money received from selling gold is classified as income hinges upon whether the person’s dominant purpose at the time of purchase was to dispose of the gold at a later date.
“If a taxpayer asserts that they did not acquire gold bullion for the dominant purpose of disposal, the onus is on them to satisfactorily show that.”
If the dominant purpose at the time of purchase was to dispose of the gold at a later date, then section CB 4 of the Income Tax Act 2007 will be applicable to any gains or losses.
“An amount that a person derives from disposing of personal property is income of the person if they acquired the property for the purpose of disposing of it” – Section CB 4 of the Income Tax Act 2007
However, there may sometimes be situations where the dominant purpose in acquiring gold bullion is to retain it for reasons other than eventual disposal, such as building up a diversified investment portfolio or as a safety measure in the event that our monetary system breaks down into barter.
In the same respect, people often buy bitcoin for reasons other than to simply sell at a later date. The price of cryptocurrencies are known to be non-correlated to traditional investments (stocks, bonds etc.), and therefore provide a great portfolio hedge.
Regardless of your reasons for buying bitcoin, if you decide to claim you had no intention to dispose of it at a later date, then you need to provide conclusive evidence to support your argument.
It also states that section CB 4 of the Income Tax Act 2007 does not apply if the intention at the time of purchase was to pass on to heirs at the time of death or to gift to another person. However, if the gold bullion was purchased with the intention of eventual disposal, and it was instead gifted or inherited as a part of one’s estate, then income tax will be applicable to any transfer of ownership.
“If at the time the property was acquired the taxpayer did not expect to hold the property forever and contemplated the possibility of sale, this alone would not bring the sale within section CB 4. The property must have been acquired for the dominant purpose of disposal. If the property was acquired for a number of reasons, disposal must be the predominant one for section CB 4 to apply. If the taxpayer can establish that they had no clear purpose in mind when acquiring an asset, section CB 4 will not apply.” – Section 14 of the analysis.
However, whilst this is very much a subjective matter, “any assertion that property was not acquired for the purpose of disposal needs to be assessed against the totality of the circumstances.”
Relevant factors to consider include (section 19):
- The person’s means at the time they acquired the property.
- Whether at that time they expect to or are likely to need to realize their investments in the future.
- Circumstances surrounding the disposal.
- The number of similar transactions made.
- Length of time the property was held for.
This judgement would suggest that if you purchased cryptocurrency with no intention for disposal at a later date, and you can prove beyond reasonable doubt that there was no intention to sell, then any disposal of such cryptocurrency should not be subject to the Income Tax Act 2007.
The ‘I got no taxes to pay’ feeling – Source
If you decide to take this standpoint towards your tax affairs, proceed at your own risk and remember to seek professional advice from a qualified Chartered Accountant.
What is a ‘disposal’?
A disposal occurs when the ownership of an asset changes hands.
In the context of cryptocurrency, disposals include both crypto to fiat transactions and crypto to crypto transactions. If you spend your bitcoin on a good or service (such as buying a coffee), this also counts as a disposal – as it is considered to be a barter-type transaction.
Basically, when one form of value is exchanged for another, it constitutes a taxable event. If you are trading between cryptocurrencies, it’s important to consider the amount of taxable gain or loss that you are incurring in $NZD and set aside the money before you forget.
“If you don’t have the money to pay for the tax, it is a good idea to consider selling some of your crypto to cover the amount of tax owing – or avoid making the transaction.” – Cryptosaver blog
For example: if you purchased 1BTC for $1,000 in January 2017 with the intention of selling it at a later date, then traded it for 10 Ether during June 2017 at a point when each Ether was worth $400, you would have made a $3,000 taxable gain. At a 17.5% tax rate, this would result in a $525 tax liability. The sensible next step here is to set aside $525 into a separate bank account for the purpose of paying tax.
Cryptocurrency in business transactions
If cryptocurrencies are accepted by a business as payment for goods or services, then it is viewed as a barter transaction and you’ll need to calculate the NZD value of the cryptocurrency at the time it is received.
Many businesses that accept cryptocurrency as a payment method offer this through a payment processor or other intermediary. In this instance, payment is received in New Zealand Dollars, and the net amount received can be recorded as revenue.
“For some ‘altcoins’ (cryptocurrency other than Bitcoin) it may be necessary to convert into US dollars, or any other fiat currency, and then convert into NZD. Rates can vary significantly between different exchanges and currencies. You must use a consistent exchange and conversion approach.” – IRD Cryptocurrency Q&A
Regardless of which exchange and conversion approach you use, the important point is that you are consistent with how you calculate the price. This means that you cannot arbitrage crypto-prices across exchanges in order to reduce your tax bill – unless you have a very good and justifiable reason for doing so.
Mining cryptocurrency is considered to be a business activity
Your hardworking Doge’s will have to pay their taxes – Source
If you are mining crypto, you can deduct all reasonable expenses from your taxable income. This includes a portion of your rent or household expenses (based on the amount of space that your rig takes up), associated electricity costs, mining pool fees and depreciation on equipment.
For more information about the applicable depreciation rates on equipment, use the Depreciation Rate Finder tool by IRD.
Do I need to pay GST on cryptocurrency?
Great question. Tax law in New Zealand is not very clear about how GST should be handled on cryptocurrency purchases and disposals at the time of writing. Various legal systems around the world take different approaches towards sales tax on cryptocurrency.
The Inland Revenue Department will hopefully provide clearer guidance on this matter in the near future.
“The GST treatment of cryptocurrencies is more complex, and this requires prompt movement by Inland Revenue to provide certainty and, ideally, simplicity. Currently buying cryptocurrencies and then using them to buy other goods and services could result in double tax.” – Ian Fay, Deloitte
How are initial coin offerings (ICOs) treated from a tax standpoint?
Tax implications of ICOs depend on the unique features of the cryptocurrency and how it is being distributed. If you are planning on conducting an ICO and wish to achieve certainty over your tax obligations, you can get a binding ruling from IRD prior to going ahead with the ICO.
Binding rulings do come at a cost, but if you are looking to raise large amounts of money, it can be a prudent way to ensure that you know your obligations. This way, you can have a better idea of the level of funding required, and transparently convey this information to investors.
Remember to seek professional advice before proceeding with an ICO, and make sure to consult the Financial Markets Authority (FMA) early on in the process.
What do I need to know to sort out my crypto tax returns?
As we have previously explained, gains and losses on crypto-based transactions are taxed as income tax at the time of the disposal, whilst the ownership intentions are assessed based on motivations at the time of purchase.
As an individual (i.e: not a business), you need to file an IR3 tax return by July 7th for the previous financial year ending 31st March. If your taxes are handled by an agent such as an account or tax refund company, then you have until 31st March of the following year to submit your tax return (almost 9 months extra).
Due to the constantly changing nature of crypto tax laws, some investors are adopting a ‘wait-and-see’ approach by avoiding making any further crypto transactions and not including cryptocurrency gains in their tax returns until the guidance by IRD becomes clearer.
This is a risky approach that could result in large penalties.
“Operating in the digital world doesn’t absolve you from your tax obligations. It also doesn’t mean you activity is untraceable.” – Inland Revenue Department
If you find yourself with unpaid tax liability from previous periods, consider submitting a voluntary disclosure to IRD if you are worried about being audited in the future. The advantages of making a voluntary disclosure are that you will not be prosecuted in court (if you make a pre-notification disclosure), and any shortfall penalty will be reduced.
Quality record keeping is paramount
You are legally required to maintain financial records (such as exchange data, bank statements and any other relevant information) for 7 years. This way, if you are audited by IRD, you can then provide all the necessary information to support any income or loss claims that you have made.
Let’s hope you don’t need a filing cabinet this big – Source
Crypto-tax software can make the process of accounting for your crypto transactions much easier, and provide you with much more reliable information. If you have made a significant amount of transactions during the previous financial year, the process of calculating your costs and tax liabilities can become quite cumbersome.
The following services integrate directly with exchanges and automate away the calculation of your gains/losses:
- Bear.Tax is great for people who only need to account for a few transactions. Prices begin at $0.99/year for up to 20 transactions, with other packages available for higher volume clients.
- Bitcoin.Tax partners with a handful of accounting firms, and offers a very affordable service for traders and people with higher transaction volumes. Pricing begins at $29.95/year for individuals that have made less than 10,000 trades.
- CoinTracking.Info is a powerful set of tools that can do much more than simply calculate and prepare tax returns. They offer a range of analytics tools that are very useful for both amateur and professional traders. They also provide a free plan for up to 200 transactions.
Not only does keeping quality records provide you with a clearer picture of your finances, but it also makes the job of filing tax returns much easier, and helps to keep your accounting bill to a minimum.
Tax law takes time to react to innovation; cryptocurrencies are rapidly evolving
Tax departments around the world are working hard to understand what cryptocurrencies represent, and how they fit into the existing taxation framework. The cryptocurrency space is evolving at a much faster rate than centralized government departments can keep up with, and this is likely to be the case for the foreseeable future.
At the moment, the IRD treats cryptocurrency in general as a non-income producing form of property similar to gold. Although there is lots of room for interpretation within their guidance, their current view is that cryptocurrency is almost always purchased with the intention of disposal at a later date.
Whilst this may be true for a wide range of bitcoin owners, it only paints a narrow picture of what’s going on here. The truth is that there are many reasons why people buy bitcoin and other cryptocurrencies that aren’t yet accounted for by our tax law.
Investors are purchasing NEO and KuCoin Shares with the intention of receiving a passive income. Dapp and software developers are purchasing Ether to test out their new and innovative applications, and appliance manufacturers & statisticians are making use of IOTA to participate in the data marketplace. These are just a handful of the current uses of cryptocurrencies that are hard to classify within the current framework.
Whilst this renaissance of financial innovation is creating immense opportunities, it is also leaving many accountants and other tax-related professionals scratching their heads, wondering what’s next.
Tax law will always be changing to suit the constant evolution of our economy, and there will always be people testing the limits of laws and boundaries. From time to time, the IRD makes an example of someone who tests the law to its greatest extent – don’t be that person.
Tips for reducing your tax bill
To provide our readers with some practical tips for reducing their crypto tax bill and mitigating overall risk, we had a chat with a skilled Chartered Accountant who focuses on taxation – Helen Carbery.
Helen: At the end of the day, if you make money on crypto, it’s taxable. But all you can do is make sure that you maximize your tax deductions. Make sure that you keep really good records so that you can identify all your trading costs. Keeping good records also keeps your accounting fee down. Plan any other costs – you might be running a home office, keep good records of this.
Callum: If you’re mining cryptocurrency, could you claim depreciation on your equipment and also rent on whatever floor space it’s taking up?
Helen: Yes, absolutely. But even if you’re just buying and selling them with sufficient regularity, you still need a computer and a desk for this purpose. So you can still justify some floor space as a crypto trader. You don’t have to be mining to justify a home office cost.
Callum: That’s interesting. If you are actively involved in the crypto space, and you attend meetups, could you claim your fuel expenses and any drinks you buy at those meetups, or is that pushing it?
Helen: I think you could. If you went to a crypto meetup, you could claim your mileage to get there and back, and you could claim the cost of the conference 100%. Food and drink while you’re at the conference – that’s probably closer to an entertainment expense, which would be 50% deductible. If you’ve done any online learning or seminars that you have paid for, or received any advice from people that have charged you, these costs can also be claimed against your cryptocurrency income.
Callum: So any accounting fees would be deductible?
Helen: Yes, absolutely! So my suggestion is that you can’t get away from the taxable nature of the income, but make sure that you keep good records and claim anything that you can against it.
Callum: Thank you very much for your time.
Helen: No worries.
Hopefully, this gives you a few ideas for ways that you can manage your crypto taxes in a way that minimizes your liability.
Onwards and upwards
We are pioneering new territory here in the wonderful world of crypto, and it will be some time before tax departments catch up. In the meantime, if you are unsure about how to proceed, consider seeking professional advice.
And if you’re wondering about laws relating to cryptocurrency tax in Australia, check out the Australian edition of our guide to tax implications of buying and selling bitcoin.
Disclaimer: this article is accurate to the best of our knowledge at the time of writing. However, we are not accountants, and this is not financial advice. We cannot be held responsible for any actions that you take as a result of reading this article. We recommend that you seek professional advice if you’re unsure about how to proceed.