Cryptocurrency and your tax obligations

Over the last decade, the use of digital or virtual currencies, known as ‘cryptocurrencies’, has grown dramatically in popularity. Operating in the digital world doesn’t absolve you from your tax obligations; it also doesn’t mean your activity is untraceable.

A single piece of Bitcoin is currently valued at over $9,000 NZD. Some New Zealand retailers have already begun accepting Bitcoin as a form of payment, which has led to Inland Revenue publishing information on the tax treatment of cryptocurrency.

Bitcoin, Ethereum, Ripple, and Litecoin are some of the well-known examples of cryptocurrencies, which is essentially money that exists only in digital form.

Cryptocurrency is usually encrypted using blockchain technology that regulates the generation of new units and verifies funds transfers. It operates independently of any central bank and can be transferred without going through a bank.

IR’s view is that cryptocurrencies are a type of personal property, not actual currency. To be true currency, the currency needs to be issued by a Government. Just like property, when you acquire cryptocurrency for the purpose of selling or exchanging it, the proceeds you make from selling it are taxable.

Tax is also applied when one cryptocurrency is swapped for another. You don’t need to cash out to dollars to create a tax obligation.

Likewise, if you receive cryptocurrency as a payment for goods or services, this is considered business income and is taxable.

Tax rules for foreign exchange don’t apply when it comes to cryptocurrencies. It is important to keep good records of your transactions as this information will be useful when filing a tax return.

IR is of the view that Bitcoin and similar cryptocurrencies do not generally provide any benefit other than when they are sold or exchanged and notes this strongly suggests that cryptocurrencies are ordinarily acquired for the purpose of disposing of them. In which case, any gain on disposal will be taxable.

IR’s Q&A does not refer to GST, but it is possible to apply its approach to income tax in the GST context, specifically if cryptocurrencies are to be treated as personal property assets. It is then logical that the GST will need to be accounted for on transactions involving cryptocurrencies for GST registered persons. Non-GST registered persons who are trading in cryptocurrencies will need to register for GST if they are making taxable supplies over the $60,000 annual threshold.

There is still room for additional guidance from Inland Revenue on these issues in respect to the issue of cryptocurrencies in the future. We’ll keep you posted, in the meantime if you have any questions, please get in touch.