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Market conditions can change quickly in the world of crypto. Indeed, it doesn’t seem long ago that people were asking “how high can Bitcoin go?” and considering the extent that altcoins would “go along for the ride”.
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Several months on, we are faced with the sobering reality of declines in the range of 50-90% and contemplating whether we might still go lower. When facing losses, it would be understandable to discount tax considerations under the belief that there will be no tax to pay. However there may be opportunities for investors, depending on their situation.
Inland Revenue’s position is that crypto assets will generally be acquired on “revenue account”. This means the asset gains will generally be taxable and crypto losses will generally be deductible. Gains and losses for crypto assets arise on a “disposal”, which will typically be a sale for fiat currency or swapping one crypto asset for another.
Consequently, tax losses usually cannot be claimed while crypto assets are being HODLed – “Hold (Held) On for Dear Life”. For example, say five Ethereum were acquired in November 2021 for $6,000 and remain held on 31 March 2023, at which point they are only worth $2,000 and assuming that no further Ethereum was acquired between those two dates. For the 31 March income year (subject to an exception for traders, as below), no deduction would be available for that decline in value.
In considering, prior to a year-end, whether to sell or retain some or all crypto assets that have declined in value since acquisition, the benefits of HODLing need to be balanced against any immediate tax benefits that arise. Your views on whether the asset will in time recover and move above original cost will also be a relevant consideration.
Where tax losses result from the sale of crypto, those losses may be able to be offset against other sources of income, leading to reduced tax payments for that other income.
Use of the losses will be determined by whether the crypto assets are held personally (in your own name) or through a separate entity. For example, if you have tax losses from crypto sales in your personal name (say $20,000), and your only other income is a salary (say $90,000) from which PAYE has been deducted, then your net taxable income would be $70,000 ($90,000 less $20,000). This should result in a partial refund of the PAYE (approximately $6,600) that has been deducted from the salary.
If the crypto losses are instead incurred by a company (other than a “look through company”), the tax losses cannot be offset against your personal salary but could be offset against the company’s taxable income. If it has no taxable income across the financial year in which the losses are derived, those losses can be carried forward (subject to loss carry-forward requirements). If the company is part of a group of companies, the loss may also be transferred to another of those companies, providing it has taxable income (subject to shareholder commonality requirements).
If crypto assets are owned by a trust, they can be offset against its income, but there is no ability to transfer those losses to other entities or beneficiaries of the trust.
Those in the business of “trading” crypto assets for income tax purposes may be able to claim unrealised tax losses. This arises due to the trading stock rules, which include the potential option of applying “market selling value” as the method of valuing closing stock.
Where that closing value is less that the opening cost, applying this method will result in a more favourable outcome for that income tax year. Continuing the example above, where a “trader” can use “market selling value” for valuing closing stock, then for each Ethereum held as at 31 March 2023, the trader could claim a deduction of $4,000 (closing cost of $2,000 less opening cost of $6,000).
Investors who are late filing their tax returns for prior years may find themselves with both “tax to pay” and “tax loss” periods resulting from their crypto dealings. Given the complexities that can be involved in accounting for crypto assets, rectifying past periods and planning for future periods, we recommend getting expert advice.
For more cryptocurrency advice, contact Bhavya Patel (Auckland) firstname.lastname@example.org, Jordan Hartley-Smith (New Plymouth) email@example.com, Mark Kingsford (Auckland), firstname.lastname@example.org, Matt Bonner (Wellington) email@example.com, Matt Shallcrass (Christchurch), firstname.lastname@example.org, Mike McDrury (Christchurch) email@example.com or Nick Guy (Auckland) firstname.lastname@example.org.
DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.
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