Tax talk for Crypto-investors

Cryptocurrency investing spiked after the first national lockdown in 2020 and there are no signs of it slowing down, as the global market capitalisation of cryptocurrency doubled in Q1 2021 to over $2 trillion. It is often said that “crypto never sleeps”, but many investing in cryptocurrency may have forgotten that the tax man also doesn’t sleep.

Cryptoassets, popularly and more widely known as cryptocurrency or digital tokens are cryptographically secured digital representations of value that can be transferred, stored, or traded electronically, with the use of blockchain technology. Personal investing in cryptocurrency is not unusual in 2021, legitimised by NZ Funds’ investment in Bitcoin and international business influencers praising the benefits of the technology.

However, there is no typical profile for a cryptocurrency investor, with everyone from newbies and hobbyists to advanced traders having access to exchange and brokerage platforms. This accessibility has meant many Kiwis have ventured into cryptocurrency investing. The caveat is that they may receive an unwanted letter from IRD later this year. 

No gain without a little pain

Cryptocurrency itself has been around for quite a while, first appearing in 2009 and becoming an increasingly popular investment vehicle in 2017. The increased investor activity sparked more comprehensive tax guidance from the Inland Revenue in September 2020. For those new to the space, the biggest eye-opener in this guidance was the emphasis that almost in every circumstance, investments in cryptocurrency are considered to be for the purpose of disposal, as they are primarily speculative.

This stance means that anyone who has purchased and disposed of cryptocurrency has taxable income or a deductible loss to declare to the Inland Revenue.

The Inland Revenue’s guidance also stated that activities such as swaps between cryptocurrencies, mining and trading are taxable events.

If you have carried out any of the activities above and have just learned that they are taxable, you might be wondering why all of this has not been apparent or whether you have misunderstood the tax implications. This may be due to some common ‘misconceptions’ that have existed regarding the taxation of cryptocurrency. Online forums such as blogs and social media sites have also added to the misinformation, meaning many investors aren’t aware of their tax obligations. 

Shedding light on misconceptions

Some of the noteworthy clarifications that investors may find useful to know are:

• Tax consequences are not limited to only when withdrawing to fiat. Even a simple swap between coins is a taxable transaction as you are disposing one coin and instantly acquiring another.
• Transfers of cryptocurrency between different wallets owned by you is not a disposal and therefore not taxable.
• The tax treatment for buying and selling shares does not align with the tax treatment of cryptocurrency. Shares acquired for the purpose of long term investment, which generate an income stream such as dividends, may not incur tax when disposed, but for cryptocurrency the default purpose of acquisition is deemed to be for the purpose of disposing for a gain, with the onus on the taxpayer to prove otherwise.
• The bright-line test does not apply as this only covers residential property.
• You are entitled to a tax deduction on any losses you incur on your cryptocurrency investments.
• Losses are not ringfenced which means they can be used to offset taxable income from other sources and reduce your overall tax liability.

Many Kiwis may purchase cryptocurrencies believing they are untouchable and private from the government. However, Inland Revenue is actively requesting personal information and trading history from cryptocurrency brokers and individual traders. 

Understanding your tax obligations

Understanding what is or isn’t taxable is just one piece of the puzzle. Investors also need to consider their reporting obligations and what consequences there are for getting it wrong. For one, any investor reporting realised gains or losses will be required to file a tax return. If you are a standard PAYE employee with no other income, chances are you have never had to do this. If you have made any taxable cryptocurrency transactions in the last financial year, then the clock is ticking, as the Inland Revenue requires returns to be filed by 7 July.

Just as important and possibly the hardest part for investors to understand is tax payments. If you have had a successful year in cryptocurrency and have residual income tax of $5,000 or more, you will be classified as a provisional taxpayer and may be required to pay tax in instalments for future tax years. If this does not apply to you, then you will have a standard terminal tax deadline to pay your tax to the Inland Revenue by 7 February. Those who have realised gains in the past year but have not yet withdrawn to fiat should consider setting aside cash for their tax payments.

The consequences of not meeting these requirements means you may incur penalties and interest charges, which can be quite steep. If you have recently found out that you may have unpaid tax owing from previous financial years, consider making a voluntary disclosure. A voluntary disclosure gives the opportunity for a taxpayer to proactively advise Inland Revenue about previously undeclared income. Inland Revenue is much more likely to look favourably on people who have acknowledged their tax obligations. If they have to chase unpaid taxes or conduct an audit this could result in substantially higher penalty and interest charges. 

Staying ahead of the game

As an investor, there are a few actions you can take to help manage your investments and keep on top of your taxes. It’s vital to maintain an accurate record of transactions throughout the year, whether that be selling, swapping, or staking. We recommend using a spreadsheet as a starting point. Most brokers and wallets allow data to be extracted to help with this.

Investors could also look to tax software tools not only for recordkeeping but to also understand the tax impact of their transactions. However, even tax software can have shortcomings and ultimately some level of interpretation and oversight is needed. Ideally investors should look to use tax software as a preliminary step and then consult their tax advisors to ensure transactions are being accounted for correctly.

Baker Tilly Staples Rodway has a number of specialists in this area and we are more than happy to help with any cryptocurrency related queries and tax advice. As tax agents, we can also help those who are yet to get a handle on their possible tax obligations for the financial year just ended and are dreading the 7 July deadline, by securing an extension of time for filing.

– Article by Matt Bonner, Matt Shallcrass, Nick Guy and Bhavya Patel