The number of Kiwis who own cryptocurrency in some form is around 800,000 and growing as the types of crypto develop and evolve. If you have cryptoassets, you may expect the tax treatment to be similar to your investments in shares – gains on the sale of shares aren’t always taxable. However, that’s not the case with cryptoassets – profits on the disposal of cryptoassets are subject to income tax and must be included in your tax return. Even exchanges between tokens are considered to be taxable events, so profits on exchanges must also be calculated. This applies even if you’re a ‘dabbler’.
Although there are currently no tax provisions specifically for cryptoassets, and very little case law, Inland Revenue is applying current tax legislation to this topic, and has released guidance material – see our separate section here.
* For the purpose of this blog, the contents are only relevant to crypto investments, and not crypto miners
▶ What type of trader are you?
▶ What’s actually being taxed?
▶ What is a sale or disposal?
▶ Common pitfalls
▶ What does Beany need to know?
▶ A thin silver lining
▶ Current Inland Revenue guidance
Where to start…?! There are different types of cryptoassets. Some of the more popular ones at the moment are:
This is the most common and what most people think when considering cryptoassets – Bitcoin, and buying/selling crypto coins.
Non-Fungible Tokens (NFTs)
This is an individual cryptoasset which cannot be replicated – it’s one of a kind. An example is a piece of artwork in digital form. These things can go for serious money – check out this collage created by Beeple – it sold by Christie’s for $69m in March 2021. And that’s USD 69m!
Yield farming and staking
These are two additional methods where individuals can use their cryptoassets to gain yet more capital, passively. With yield farming, you can temporarily lend your assets to DeFi platforms for a period, earning interest. Think of it like Peer-to-Peer lending. You’re making your funds available to others, and you receive interest. The more lent, the higher the reward.
Staking your cryptoassets allows them to act as nodes and confirm blocks (not via a DeFi platform), which enables transactions to be make on the blockchain using your assets rather than using additional electricity and processing power. You can stake over a set period of time (locked staking, similar to a term deposit) or flexibly.
Bitcoin futures, options, and swaps
Recently, the market has taken cryptocurrency a step further by offering the hedging of Bitcoin assets. This includes derivatives such as futures, options, and swaps. The New Zealand Bankers Association provides brief descriptions of these derivatives.
Now – derivatives are very complex financial instruments. Add the many types of cryptoassets being developed and evolving, and it’s likely that trading in derivatives is very high risk.
You should be well-versed in Bitcoin and the derivatives market before considering hedging Bitcoin assets. Being a relatively new product, we suggest you perform detailed due diligence. This will include:
- Whether or not the derivative instrument is regulated by a recognised authority.
- Understanding how the derivative is calculated.
- Considering why you are hedging – are you speculating, or is it to mitigate risk on a transaction which may or may not happen in the future?
- Researching the history of the provider.
- Reading any customer reviews on the provider and/or derivatives in general.
We’ve identified that people will usually fall into one of the trader types below.
You will usually have good records from when you started and understand that you have to pay tax on profit.
Yield farming / staking investors
If you’re involved in yield farming or staking, you’re likely wanting regular returns on your investment, rather than waiting for the pure gain upon sale. Yield farming is usually your cryptoassets being provided via a Decentralised Finance System (DeFi), which should be able to provide you with detailed records that we need for tax purposes.
Just buying and holding
Not actually trading crypto – the taxable income shouldn’t be too difficult to determine as there will only be a few transactions.
If you’re at this level, you’ll have an understanding of the tax implications of Crypto and use specialised software to keep track of holdings and calculate tax.
The majority of traders are probably just “dabblers’ where you invest and transfer your holdings on an ad-hoc basis. In our experience, we have found that these types of investors do not always keep the best (if any) records or realise that there are tax implications on trading in cryptoassets.
The IRD’s position is that you are responsible for preparing your own records and provide these to your accountant at year-end. Your Beany accountant will check a few transactions for the logic and reasonability of the figures. Examining every transaction is very time-consuming, so it’s not something we can include in your usual Beany package.
Ultimately, the onus is on you to provide us with the correct information.
Crypto is deemed personal property. It considered to be similar to gold – purchased for the sole purpose of generating future gains when you sell it. Generally, crypto does not offer returns on investments while holding, although there are a few exceptions to this (staking), but as a general rule, the intent on purchase of crypto is for this future gain.
Tax is calculated on the realised gain or loss when there is a sale* of a cryptoasset, and this is where it gets complicated.
You’re also taxed on any interest income you receive from crypto, and this is likely to be in the form of coins.
* Many people think that there’s only a gain or loss when you actually sell crypto and no longer hold that particular asset. Not so – see the section below.
Inland Revenue has deemed the sale of crypto as a taxable event – the sale triggers the requirement to work out the profit or loss made on the sale.
A sale or disposal of crypto includes the following:
- Actual sale of the crypto
- Transfer between different types of cryptocurrencies ie: from Bitcoin to Ethereum
- Exchanging one form of cryptoasset for another
- Gifting to someone else – if you gift crypto to a partner, this is a deemed disposal.
The transfer between wallets of the same type of crypto is not a disposal, and therefore not a taxable event.
- Platforms may use different terminology – in some wallets, a reference to a sale could actually be a transfer and not an actual sale.
- Currency of the wallets – transactions taking place in foreign currencies (usually USD or Euro) need to be translated into NZD.
- Even if there’s only a small balance at the end of the year, this could hide hundreds of underlying transactions and movements between wallets – each of these needs to be considered when calculating your crypto profit.
We’re relying on you to let us know the following:
- The cryptoassets you own
- The reasons you had for buying the asset
- What you plan to do with cryptoassets in the future
On the numbers side, we need to have:
- The number and cost of coins held at the beginning of each year.
- The year’s ledger from each platform provider, clearly identifying:
- All sale transactions with dates, quantities, and values
- All purchase transactions with dates, quantities, and values
- Fees charged
- Transfers (ie transfers between BTC platforms)
As you can see, there is a lot of information we need you to provide your Beany accountant to enable us to calculate your crypto tax position each year.
To make this easier for you we recommend that you use an online platform like Koinly, which easily enables you to keep track of your transactions and holdings.
- Sales and disposals of cryptoassets disposals are not part of the GST regime (yet)
- The assets themselves are not considered to be a Financial Arrangement under current tax law (which is an extremely complex tax area in itself). On the flip-side, the assets are not regulated by the New Zealand Financial Markets authority
- If you make a loss on the sale of cryptoassets, it’s tax deductible.
As mentioned at the beginning of this blog, there are currently no specific legislation or case law on cryptoassets. You can bet it’s coming though. Here are some of the links to IRD literature. We don’t expect you to read them (all) – just get an idea of the work involved when calculating your taxable income from cryptoassets.
IRD site for taxing cryptoassets
IRD’s GST policy issues (from page 9 for cryptocurrencies)
Providing cryptoassets to employees
Tax treatment of cryptoassets received from an airdrop
Tax treatment of cryptoassets received from a hard fork
Plaease get in touch with our Support team if you’d like more information.