Tax on Cryptocurrency: Guide for Your Crypto Assets in New Zealand
I was trying to make sense of the Inland Revenue Department’s (IRD) latest guidelines regarding tax on cryptocurrency when I stumbled upon an article by Ian Fay from Deloitte: “If you found a bitcoin under the Christmas tree, should you be worried about a tax bill?”
This question summed up my doubt, and I really wanted to know!
I’m sure this is a question many of you are wondering, and fair enough. The pages of guidelines published are rather dense. The bright side to this for any adopter of cryptocurrency, however, is that current acceptance of cryptocurrency must be trending in order to gain the IRD’s close attention.
In many ways, New Zealand is following what many other countries have done – to have regulations around how tax should be applied to crypto assets. And this process of taxing of cryptocurrency means that we now have an official and legal understanding of cryptocurrency and what is or isn’t a “taxable event” (don’t worry – we’ll explain what that means soon!).
This article will explore the Inland Revenue Department’s views on cryptocurrency and explain the ways in which cryptocurrencies are taxed.
Tax on Cryptocurrency
There are two types of tax that can apply to crypto assets: income tax and goods and services tax (GST).
- Income tax – Currently, all New Zealanders must pay income tax on their cryptocurrency proceeds from taxable events (explained below).
- GST – In New Zealand, any goods and services traded, local or imported, incur 15% GST. IRD has signalled that this will be removed in early 2021
For now, cryptocurrency adopters should consider keeping detailed records of their trading activity as the IRD are reviewing the subject matter on applying GST on crypto assets.
The tax an individual pays on their crypto assets will depend on their individual income tax rate. If an individual has made income from cryptocurrency, they will need to fill out an IR3 form, or that they may need to request a change to an IR3 filer.
In short, taxable events are any type of cryptocurrency transaction that results in a tax liability. Common taxable events include:
– Selling crypto.
– Swapping crypto from one type to another type (e.g. changing your Bitcoin to Ethereum) or Trading crypto (eg buying and selling frequently to try and make a profit).
– Using crypto to buy other goods and services (e.g. using a crypto credit card).
– Mining activities.
However, when one buys and holds (or hodl) cryptocurrency then it is not classified as a tax event.
Cryptocurrency Tax Classification
The IRD currently classifies cryptocurrency as property but understands it as an asset that exists virtually. In this way, how cryptocurrency is treated under current tax regulations is similar to those of property such as residential houses and land.
Depending on the purpose, duration, and intention, the sale of your cryptocurrency may or may not be taxable. As such, how the tax might apply may be on a case by case basis and we suggest that you get in touch with the IRD directly or speak to an accountant who is familiar with cryptocurrency. We recommend Tim Doyle who is an accountant specialized in cryptocurrency.
IRD have outlined in their guidance that purpose is key when deciding whether an event is taxable. This is, however, often difficult to judge. Therefore, what you do with your cryptocurrency,how long you have them, all serve as evidence and support your intention claims.
Your actions support your intentions. If you are buying and selling cryptocurrency regularly, then there is no evidence that supports a non-taxable position. You must do what you say you will do, and just claiming that you have purchased cryptocurrency, for example, a long-term investment, is not sufficient.
The current brightline test for property, for example, is set at 5 years. While IRD makes no mention of a timeframe for cryptocurrency, the longer your position is continued, the more support it adds to your intention.
The 5-year period mentioned in the case of the property brightline test above is used as an example only. The nature of this non-taxable position is subjective, and the entire cryptocurrency position, activity and history needs to be considered.
How the taxable amount is determined depends on two things:
- The proceeds at the time of the sale (i.e. how you you sold your crypto asset for).
- Less the cost to acquire (i.e. what you originally paid for it).
For example, if you were to buy 1 BTC when it was trading at $10,000 NZD, but sold it for say $13,000 NZD, then the taxable income in this instance would be $3000 NZD.
Trading or swapping cryptocurrency
Trading is an activity where a person buys cryptocurrency with the intention to trade for another cryptocurrency; often on a frequent basis. Whereas, cryptocurrency swap may occur from time to time (i.e. not frequent). Drawing on the example of property, trading will be similar to a property speculator who buys and flip houses. In this sense, the income you make is taxable.
Consider the following events:
- You purchase of 1 BTC for $13,000 NZD
- A week later, you traded 1 BTC for 10 ETH, but the the BTC price was $15,000 on this day)
In this scenario, your BTC has gone up in value, and because of this, it allows you to trade for more ETH. As a result, this $2000 NZD difference ($15,000 trade price – $13,000 purchase price), is considered a taxable event.
For trading purposes, it is best to speak with an accountant on such a matter.
A transfer of a cryptocurrency token from one wallet to another, or from a wallet to an exchange (or vice versa) is not a taxable event if the cryptocurrency is owned and controlled by the same person.
However, if the cryptocurrency is disposed – that’s when the ownership of the cryptocurrency ceases – then that event is a taxable one. Example of cryptocurrency disposal will be spending your cryptocurrency using your crypto debit card (e.g. Wirex card or Crypto.com Card). This is because when a purchase is made and paid for in cryptocurrency your ownership over the crypto asset stops.
Consider the following events:
- You purchase of 1 ETH for $500 NZD
- A week later, you bought an item online (it was a backpack which cost $104 NZD or 0.2 ETH). At the time of the purchase, 1 ETH was 520 NZD. And you paid for the purchase using your Wirex card using your ETH.
In this scenario, 0.2 ETH ($104 divided by $520 which is the rate when you spent your ETH) that you have now disposed of is subject to tax. Where the taxable amount is 0.2 ETH x ($520 disposed price -$500 purchased price) = 4 NZD.
Tax on cryptocurrency for mining activity
Mining crypto is considered a business, and this means that the profits are taxable income. A parallel example within property will be a builder building houses to sell. In this way, the builder’s proceeds are taxable. However, expenses incurred from running this business are deductible. Going back to mining cryptocurrency, the costs associated with the purchasing of equipment and relevant power costs are tax deductible, just like how the builders will be able to claim the costs of building materials or consents costs.
In this way, the taxable income will be the proceeds from the sale of your crypto asset(s) less your business cost(s), and the tax you pay is dependent on your applicable tax code.
Key dates for filing your tax returns
New Zealand’s tax financial year starts from the 1st of April and ends on the 31st of March. Typically, if one does not have a tax accountant, the due date for filing is 7 July. And for individuals filing with an accountant having until 31 March (the next year) to file. You can see the IRD’s key dates calendar for more information.
The following are some useful resources that has helped me understand this topic better:
NZ Legislation on imposition of tax (that’s if you’re really wanting the nitty gritty).
I hope the examples drawn on in this article help to make more sense on the “what’s what” when it comes to understanding the tax rules around cryptocurrency. When in doubt, you can either contact IRD through their contact centre or mail option through MyIR or speak to your accountant.
For more insights, information, and the latest updates on cryptocurrency, explore the different topics we’ve published on Easy Crypto.
The information provided and services described in this website are of a general nature and are not intended to be personalised advice. The information provided in this website is not intended to be a substitute for professional advice. You may seek appropriate personalised advice from a qualified professional to suit your individual circumstances.