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.

When losses will be available

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 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, 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.

Offsetting losses against other income

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. 

Trading crypto assets

Due to a legislative change that classifies most crypto assets as “excepted financial arrangements”, those in the business of trading crypto assets will also not be able to claim unrealised losses.

An exception to this is where the crypto assets have no present or likely future market value and have been written off as worthless.  In this case, their closing stock value will be nil, which effectively provides a deduction for their cost.

If a crypto asset is not an “excepted financial arrangement”, there may be the potential for a “trader”’ to claim unrealised losses through using market selling value for valuing their closing stock.  There will not be an excepted financial arrangement if, as a consequence of ownership of the cyptocurrency, the owner receives or is entitled to receive, during the period of ownership, amounts that are determined:

• By reference to the quantity or value of the cryptocurrency; and
• On a basis that is known by the owner in advance; and
• Not by reference to the profits of a business activity

Late filing

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 a member of our crypto team, below.

This article was updated on 1 September 2023 to take into account changes to legislation.