The cryptocurrency space is becoming increasingly mainstream.
As at September 2021, CoinMarketCap values the global cryptocurrency market cap at USD 2.28Trillion. The eco-space is evolving at lightning pace and its decentralized nature is at odds with traditional tax notions of tax residence and source.
The New Zealand Inland Revenue Department’s view is that cryptocurrency is property and not a currency. To date, there is no specific legislation dealing with cryptocurrencies and the income tax treatment is dealt with under existing provisions.
Section CB 4 of the Income Tax Act 2007 states that “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.”
In the IRD’s view, if a person holds cryptocurrency and disposal was their dominant intention when it was acquired, the disposal will be a taxable event. The onus of proof to establish the person’s intention is on the taxpayer.
A disposal event includes selling the cryptocurrency for fiat (eg BTC to USD), trading it for another coin (eg BTC to ETH), using it as payment for goods or services, transferring ownership or gifting the coin or token. A disposal does not occur when coins are transferred between wallets.
Gains or losses are calculated on either a FIFO or weighted average cost basis for each coin or token and transactions are converted to NZD. If the person is in the business of trading cryptocurrency, the trading stock rules apply.
Although there is no specific legislation, the IRD has issued a number of rulings and guidance in relation to PAYE and FBT obligations when employees are paid salaries or bonuses in cryptocurrency, the application of the employee share scheme rules, GST when payment for a taxable supply is made in cryptocurrency, and the tax treatment of mining and earning staking rewards, airdrops and hard forks.
The taxation of cryptocurrencies is a complex and evolving area and we can expect increased IRD audit activity. The IRD has already requested information from NZ based exchanges such as Easycrypto and BitPrime and therefore taxpayers who use New Zealand based exchanges may already be on the IRD’s radar.
Parliament’s Finance and Expenditure Committee has recently announced an inquiry into the nature, impact and risk of cryptocurrencies.
