Cryptocurrency Tax NZ : A snapshot of crypto tax treatment

CryptocurrencyTax

27 April 2022

Since its inception, cryptocurrency has been a contentious topic of discussion for lawmakers, tax consultants and investors and will likely continue to be for some time.

The arrival of Bitcoin in 2009 opened the door for new technologies and investment opportunities and disrupted the status quo of financial markets as well as the industries that supported the financial markets and revenue authorities. This disruption continues today on a much larger scale due to the many cryptoassets on offering.

The emergence of Blockchain technology and the appeal of decentralised and encrypted currencies is capturing wider audiences. Based on the current trend, it almost seems inevitable that cryptocurrency will become a staple in many diversified investment portfolios. The mystique and cult reputation of cryptoassets has passed and the asset class is no longer dismissed as a passing craze.

Now, we’re at the point where the regulatory nature of cryptoassets cannot be ignored, and in 2021, Parliament issued an inquiry into the current and future nature, impact and risks of cryptocurrencies (currently at the review stage with the Finance and Expenditure Committee). Part of this inquiry focuses on cryptocurrency tax in NZ.

Inland Revenue’s position on cryptoassets

New Zealand currently does not have a legal framework specific to cryptocurrency tax in NZ. Inland Revenue’s view is that cryptoassets share the characteristics of personal property rather than currency for tax purposes. This view is in line with the tax treatment of cryptoassets in other jurisdictions.

Taxation of cryptoassets as property

As personal property, intention is key. If the intention is to sell the asset at the time of purchase, the cryptoasset is likely to be taxable on disposal of the asset.

Inland Revenue has indicated that the taxation of cryptoassets should be treated in a similar way to that of gold bullion, because generally these investments do not generate passive income when held. As the only way to realise any return on investment is through disposal of the gold bullion (and cryptoassets), Inland Revenue’s view is that it would be difficult to assert that acquisition was not made with the main purpose to dispose.

Given the nature and use of cryptoassets is ever changing, the above position is blurred when cryptoassets are used to generate further cryptoassets. Inland Revenue have not yet provided their position on the nature of these types of cryptoassets.

Where a taxpayer is considered to be conducting a trading activity, cryptoassets held should be treated as trading stock. This makes them taxable and subject to tax rules relating to trading stock.

Tax residency considerations

Generally, a New Zealand tax resident is subject to tax on New Zealand and worldwide income sources. A non-resident is subject to New Zealand tax where it has a New Zealand source. The source of income earned from cryptoassets may be difficult to determine given the distributed nature of blockchain technology.

There are various interpretations as to how source may be viewed:

  1. Treating all income earned from cryptoassets as foreign sourced amounts.

  2. Treating the jurisdiction where cryptoassets are mined as the source of the income.

  3. Treating where the exchange of the cryptoasset has been traded as the source of income.

While the above is not currently clear, Inland Revenue’s comments indicate they do not wish to create a barrier by creating additional compliance to investment in cryptoassets. To do so, their tax policy would need to align with that of other jurisdictions.

International treatment

Foreign treatment of cryptoasset investments and their tax implications differ from cryptocurrency tax in NZ. In the most part, this is due to various other jurisdictions’ (notably, Australia and the United States) imposition of capital gains taxes.

Most countries share the view that cryptoassets should be treated as a taxpayer’s personal property and thus classed as an asset, however they go about taxing this differently. Disposal, either through exchange for another type of token or for fiat currency will result in a taxable gain. In Australia or the United States, this may be taxed as capital gains or as ordinary income. However, in New Zealand, the amount needs to fit into the treatment of ordinary income.

Each taxpayers’ situation is unique. Because of this and the differences in how foreign jurisdictions are treating cryptocurrencies, New Zealand taxpayers should consult a tax consultant to obtain specific advice before claiming credits for overseas taxes.

New Zealand amendment Act clarifies GST treatment of cryptoassets

The recently enacted Taxation (Annual Rates for 2021-22, GST and Remedial Matters) Act 2022 treats the trading of cryptoassets as a “financial service” and therefore an exempt supply for the purposes of the Goods and Services Act 1985.

This includes the following defined terms in the Goods and Services Tax Act 1985:

1. “Cryptoasset” means a digital representation of value that exists in:

a) A database that is secured cryptographically and contains ledgers, recording transactions and contracts involving digital representations of value, that are maintained in decentralised form and shared across different locations and persons; or

b) Another application of the same technology performing an equivalent function.

2. “Cryptocurrency” means a cryptoasset that is not a non-fungible token.

3. “Non-fungible token” means a cryptoasset that contains unique distinguishing identification codes or metadata.

Cryptocurrency has also specifically been excluded from the definition of “services”.

An observation is that Inland Revenue are revising their definitions and are likely to continue doing so. For example, this is the first time non-fungible tokens (NFTs) have had a separate definition within legislation. Inland Revenue will continue taking note of how revenue authorities in other countries taxing income derived from cryptoassets.

Cryptocurrency tax in NZ is complex. If you would like to discuss your cryptoassets and how you may be able to structure your holdings to achieve the best commercial outcome, please contact a Findex tax consultant today.

OECD proposes bringing Cryptoassets into automatic exchange of information between countries

On 22 March 2022, the OECD released a public consultation document concerning a new global tax transparency framework to provide for the reporting and exchange of information on cryptoassets.

Currently, financial institutions such as banks and financial investment managers are required to report on those who are resident in a partner jurisdiction and who have accounts, loans or investments with them. The OECD is proposing that “Cryptoasset Service Providers” be subject to the same reporting requirements. This would apply to crypto-exchanges, brokers and counterparties. There are over 100 partnering jurisdictions, including New Zealand.

Inland Revenue has used information provided by financial institutions currently subject to reporting requirements to ensure that New Zealand tax residents are complying with their tax obligations on their foreign investments. It also uses information provided by New Zealand based exchanges to ensure taxpayers are complying with obligations for cryptoassets. It’s likely that these changes will allow increased scrutiny by Inland Revenue on New Zealand tax residents’ worldwide cryptoasset portfolios and compliance with New Zealand tax obligations.

Submissions on these proposals must be with the OECD by 29 April 2022. We can assist you with the submission process.

Tax Compliance and Record Keeping

Exchanges and wallets are highly encrypted, decentralised, and inherently private. However, we can expect to see Inland Revenue increase their audit activity in this area. Record keeping is therefore important. Inland Revenue’s expectation would be that all income and losses returned in income tax returns would be substantiated with supporting documents providing proof of transactions and rates.

The self-assessment framework for tax in New Zealand by its nature recognises that voluntary compliance by taxpayers as an integral part of the framework. Inland Revenue encourages compliance and they have released various commentary on how existing legislation should apply. In terms of the actual calculation and application of legislation and commentary to individual factual circumstances, this is where Findex can bridge the gap.

What Findex offers

Findex offers a tailored solution to your cryptoasset transactions. We can advise on how current legislation applies to your situation. We can provide specialist advice on specific transactions, portfolios and trading activities.

This includes undertaking tax calculations of trading profit and losses, the claiming of trading fees, and the deductibility of certain amounts incurred when trading.

Findex is engaged with the cryptoasset taxation development in New Zealand and is positioned to assist all types of investors as the space continues to expand and evolve. If you have bought, sold, or exchanged cryptoassets, or plan to do so, please speak to your advisor or contact a member of the Findex Tax Advisory team.

Author: Ernie Chan

Ernie joined Findex in March 2021 as a Senior Tax Manager. He brings over 14 years of specialist tax and business advisory experience in both public practice and commercial settings to the role and has specialist knowledge in e-commerce, digital systems, tax planning, and cryptocurrency.