Cryptocurrency and Tax in NZ articles
27 Jan 2023
The New Zealand Inland Revenue Department’s (IRD) approach to taxation of cryptocurrency transactions, whether holding or dealing, has been developing over the last few years. However, the practical aspects of the ‘trade or hobby’ tax treatment need addressing.
For example, the IRD does not clearly differentiate between traders and investors (long-term hold) when taxing profits earned from cryptocurrency. This means it does not matter from the IRD’s perspective whether a New Zealand tax resident is trading cryptocurrency as a hobby or earning income from it as a deliberate purpose; the tax treatment is the same. While the IRD has stated that buying and selling cryptocurrency is no longer subject to GST (provided they are fungible. Non-fungible tokens [NFTs] are still subject to GST as they are non-fungible and unique assets), all profits from trading and cryptocurrency is likely to be taxable.
This is different from other tax treatments (for example trading in shares) as there is usually a threshold to be met when a hobby is considered to be a business and requires income to be declared [see Trustees of the B Trust v Commissioner of the Inland Revenue and Inland Revenue Commissioner (NZ) v Watson]. With some cryptocurrencies like Ethereum having a return of 750% before plunging by 80% of its original value, trading just a few times is enough to make a sizeable profit or loss. So, it begs the question, why does the threshold of determining whether the activities amount to a business or hobby not apply to cryptocurrency?
Practical Implications of Transacting in Cryptocurrency
Taxpayers need to file a tax return when they have taxable income from cryptoasset activity. In doing this, before you can put your cryptoasset net income (or loss) in your tax return you need to:
- calculate the New Zealand dollar value of the cryptocurrency transactions and
- work out your cryptocurrency income and expenses.
Essentially this turns everyone who earns profits from cryptocurrency into a “business owner”. For many people, the process of filing a tax return is tedious and subject to many compliance laws, which is why businesses usually hire accountants for these types of tasks.
If you held cryptoassets that were stolen, you may be able to claim a deduction for the loss.
Accordingly, it is important to keep good records for all your transactions with cryptoassets.”
Taxing Cryptoasset Income
Full disclosure of revenue is required; this needs evidence proof to substantiate. This raises several problems for investors who transact on multiple exchanges and also with ‘bot’ trading in micro trades where tracking can become difficult.
It also raises problems for investors who earn an income from their regular job, tax deducted at source, without needing to file a tax return and profit from investing in cryptocurrency.
One is a compliance issue for investors when declaring profits from cryptocurrency could potentially subject them to a higher tax bracket or be more complex than they had assumed. For example, someone who earns $68,000 a year and makes an extra $5,000 from cryptocurrency would be subject to the income tax bracket of someone who earns $73,000 a year through regular employment. While both people will have a take-home pay of $54,734.20, the taxpayer with an income of $73,000 through employment has their taxes paid through P.A.Y.E. by their employer, and the person who earns $68,000 needs to file a tax return for the extra $5,000 they made through cryptocurrency. By the time they decide to hire a tax agent who knows the work involved, compliance costing at least an additional $1,000, not to mention the work of maintaining and compiling the paperwork they require, the $5,000 profit has dwindled to less than half. This excludes seeking out any other agents that specialise in cryptocurrency taxation.
It also begs the question of why these cryptocurrency investors would voluntarily file a tax return if, in the end, they retain less than half of the profits they originally earned.
The way cryptocurrency is taxed currently is unlikely to cause any significant issues for traders as all or a substantial portion of their income is derived from investing in cryptocurrency, which would already put them in the “sole trader business” of cryptocurrency. Furthermore, as their taxes are not deducted by an employer when they receive their income, it is only logical that they must file their own tax returns just as a business owner would.
Another potential issue is that while purchasing cryptocurrency does not trigger a taxable event, all other subsequent events to profit from cryptocurrency such as selling crypto for NZD, trading one coin for another, and using crypto to purchase goods or services, may have tax consequences. For example, suppose you choose to keep your assets in cryptocurrency, and there is an unrealised profit when its market value is higher than the original purchase price. In that case, it remains an untaxable event for so long as the gains have yet to be crystallised.
IRD has outlined that cryptocurrency’s lack of ability to produce an income stream or provide any benefits, except when they are sold or exchanged, strongly suggests that cryptocurrencies are generally acquired to sell or exchange them.
Cryptocurrency obtained from mining is also taxable, with further income tax to be paid on the profits made upon disposal of these cryptocurrencies. It makes no difference whether you are mining as a business, for a profit, for ordinary income, or as a hobby; the tax treatment is the same.
Cryptocurrency and Tax and Going Overseas
Profit earned from trading cryptocurrency is included in your worldwide income, and all New Zealand tax residents are subject to tax in New Zealand on their worldwide income. A new or returning tax resident after 10 years is eligible for a 4-year temporary tax exemption of foreign income, including cryptocurrency that has a source outside of New Zealand. A non-tax resident is only taxed on cryptocurrency that has a New Zealand source.
Recommendations: How Crypto is Taxed in Other Countries
Cryptocurrency is subject to different rules in Australia and the U.S. With a capital gains tax in those countries, the ATO and the IRS give their investors a tax break. It may also eliminate small-time payers’ nominal disclosures that take up Revenue officers’ time.
Particularly in Australia, the capital gains tax allows for the first $18,200 AUD of personal income to be tax-free, and cryptocurrency investments held for more than 1-year are subject to a 50% capital gains tax discount.
The current system used in New Zealand to tax cryptocurrency renders the individual investor and even traders subject to possible disclosure errors which come with harsh penalties leaving New Zealand a hostile environment for those who wish to benefit from the early adaption of and invest in cryptocurrency. The cryptocurrency industry is now roughly valued at $900 billion USD, and with the tech and digital age coming in full force, IRD will need to provide more transparent and fairer guidelines to make New Zealand comparable to overseas tax jurisdictions as cryptocurrency popularity grows worldwide.
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