The basics you need to know. Because the tax man will commeth!

Cryptoassets are treated as a form of property for tax purposes. While there are different types of cryptoassets, the tax treatment depends on the characteristics and use of the cryptoassets*. It does not depend on what they are called.

Cryptoassets are not subject to GST when they are bought or sold, but do have GST implications when they are received as payment for normal business activities.

Cryptoassets are not financial arrangements.

Cryptoassets are cryptographically secured digital representations of value that can be transferred, stored or traded electronically. They use some form of distributed ledger technology such as blockchain.

Cryptoassets is the term used broadly, and by IRD. They are also known as:

• cryptocurrencies
• cryptographic assets
• digital financial assets
• digital tokens
• virtual currencies.

A wide range of cryptoassets exist, including:

• payment tokens
• security tokens
• utility tokens

The cryptoasset sector is still developing and there is currently no standard terminology used.

Cryptoassets for businesses

Cryptoassets

• What cryptoassets are
• Cryptoassets for individuals
• Cryptoassets for businesses
  • Cryptoasset businesses
  • Using cryptoassets for business transactions
  • Providing cryptoassets to employees
• Taxing cryptoasset income
• Non-fungible tokens

Your business needs to pay tax on cryptoassets it receives as payment, or that it sells or exchanges. Cryptoassets received as payments for goods or services provided will be subject to GST. How tax applies will depend on the type of business you have.

• Cryptoasset businesses

Cryptoasset businesses include mining, dealing or exchange businesses. Find out how income tax applies to cryptoassets used as part of these businesses.

• Using cryptoassets for business transactions

You might not have a cryptoasset business, but if your business still uses cryptoassets in some way you may need to pay tax on them.

• Providing cryptoassets to employees

PAYE and fringe benefit tax (FBT) rules apply when you provide cryptoassets to your employees. In some cases, the employee share scheme rules may also apply.

Receiving cryptoassets in exchange for goods or services

You may accept cryptoassets as a payment for goods or services you provide. IRD for tax purposes call this a barter transaction.

Cryptoassets you get in a barter transaction are still part of your business income. You need to account for GST and pay tax on this income.

To work out your tax, you’ll need to calculate the value of the cryptoassets in New Zealand dollars (NZD) at the time they are received.

Selling cryptoassets you got from a barter transaction

You will often sell or exchange the cryptoassets you got from the barter transaction. This amount is also business income and taxable because it’s part of how you earn your business profits.

In this case, you can claim a deduction for cost equal to the value of the cryptoassets when you got them. This is the same value you paid tax on when you received the cryptoassets in the barter transaction. This means the income you earned from the barter transaction is not taxed twice. GST is not payable on this sale of cryptoassets.

Cryptoassets that are not part of your usual business activity

You might sell or exchange cryptoassets when it’s not part of your usual business activity.

Any amounts you get from the sale or exchange of those cryptoassets are not part of your usual business income.

However, these amounts are generally still taxable. They will be taxable if you:

• acquired the cryptoassets to sell or exchange them
• were carrying out a profit-making scheme.

Acquiring cryptoassets to sell or exchange

Using cryptoassets for a profit-making scheme

Paying tax on your cryptoasset income

If how your business uses cryptoassets is taxable, you’ll need to work out your taxable

Taxing cryptoasset income

Cryptoassets

• What cryptoassets are
• Cryptoassets for individuals
• Cryptoassets for businesses
• Taxing cryptoasset income
  • Working out your cryptoasset income and expenses
  • Calculating the New Zealand dollar value of cryptoassets
  • Record keeping for cryptoassets
  • Cryptoassets and GST (goods and services tax)
• Non-fungible tokens

You need to file a tax return when you have taxable income from your cryptoasset activity.

Before you can put your cryptoasset net income (or loss) in your tax return you need to:

• calculate the New Zealand dollar value of your cryptoasset transactions
• work out your cryptoasset income and expenses.

If you held cryptoassets that were stolen, you may be able to claim a deduction for the loss.

It’s important to keep good records for all your transactions with cryptoassets.

Completing your tax return

When you complete your tax return, if your cryptoasset income does not fit into any boxes (such as business or self-employed income) you need to put your net cryptoasset income (or loss) in the ‘other income’ box. To claim a loss, you need to show that if you’d made a profit it would have been taxable.

Different types of cryptoasset owners will need to complete different tax returns.

Cryptoassets and GST (goods and services tax)

Cryptoassets

• Taxing cryptoasset income
  • Working out your cryptoasset income and expenses
  • Calculating the New Zealand dollar value of cryptoassets
  • Record keeping for cryptoassets
  • Cryptoassets and GST (goods and services tax)

Exempt supplies

Cryptoassets are excluded from GST. This means buying and selling cryptoassets is not subject to GST and you do not need to register for GST.

However, GST-registered businesses that raise funds through issuing security token cryptoassets (which have features similar to debt or equity securities) can claim input tax credits on their capital-raising costs.

Examples could include legal fees, exchange listing fees, and costs associated with preparing a product disclosure statement (or whitepaper in the cryptoasset context).

Business income

If you receive cryptoassets as payment for goods and services you provide, you still need to charge GST on those goods and services. You’ll need to return GST on the value in New Zealand dollars of the amount of cryptoassets that you receive as payment. Normal GST rules apply from there. When you later sell the cryptoassets you received for the payment of goods and services, you do not have to account for GST on the sale of the cryptoasset. However, there will likely be income tax to pay on the sale of the cryptoassets.

Non-fungible tokens (NFTs)

Non-fungible tokens (NFTs) are like cryptoassets. They rely on the same programming technology and exist on distributed ledgers. However, they are not the same as cryptoassets. NFTs are unique and are not interchangeable.

NFTs and GST

NFTs are classified as a service for GST. Selling NFTs is subject to GST so you need to register for GST if you sell more than $60,000 worth of NFTs in a 12-month period. If the NFTs are sold to people outside of New Zealand the sales are zero-rated for GST purposes.

NFTs and income tax

Any profit you make from royalties and from selling NFTs is income.

Under the smart contracts that establish NFTs, the creator may earn royalties each time their NFT is sold. The royalties are income at the time they receive them.

You’ll have an income tax liability on the sale of NFTs if:

• your business creates NFTs
• you buy and sell NFTs to make a profit
• you acquired NFTs for the purpose of disposal.

Unlike cryptoassets, you can sometimes use and enjoy NFTs. If you acquire NFTs for personal use and enjoyment, there is no tax to pay on their disposal.

You can also acquire NFTs as investment assets. For this reason you’ll need clear and compelling evidence about your purpose for acquiring the NFTs at the time you bought them.

Acquiring cryptoassets to sell or exchange

Cryptoassets

• Cryptoassets for individuals
  • Buying and selling cryptoassets
    • Acquiring cryptoassets to sell or exchange
    • Using cryptoassets for a profit-making scheme
    • Trading in cryptoassets

If you acquire cryptoassets for the purpose of disposing of them you need to pay income tax on any profit you make. For example, if you buy or mine cryptoassets to sell or exchange them. If you make a loss when you sell your cryptoassets you may be able to claim this loss.

Why your purpose matters

If your purpose for getting cryptoassets is to sell or exchange them, you’ll need to pay income tax when you do.

You may have more than one purpose for your cryptoassets at the time you acquire them. It is your main purpose that matters.

IRD look at your purpose at the time you acquire (for example, buy or mine) your cryptoassets. If that purpose changes later on, it does not matter.

If you plan on selling or exchanging your cryptoassets at some point in the future, then you have a purpose of disposal. It does not matter how long you plan to hold onto your cryptoassets for before selling or exchanging them. Your main purpose can still be to sell or exchange them, even if it takes a few years.

What you say your purpose is * refer commentary at the end

What you say your purpose for getting cryptoassets is must be supported by what you actually do and the surrounding circumstances, including the:

• nature of the asset (for example, does it provide an income stream or any other benefits while being held)
• circumstances of the purchase
• number of similar transactions
• length of time you hold the asset
• circumstances of the use and disposal of the asset.

Just saying why you got your cryptoassets is not enough. For example, you might say you got your cryptoassets as:

• a long-term investment
• a hedge against inflation
• portfolio diversification
• a store of value outside the monetary system.

These types of reasons usually still involve a purpose of eventually selling or exchanging your cryptoassets. There will be a purpose of disposal if sale or exchange is the way to achieve your goals.

Income streams from your cryptoassets

Sometimes you might earn an income from holding cryptoassets. For example, you might stake your cryptoassets or use a staking-as-a-service provider to earn more cryptoassets. Having an income stream is a factor to consider when thinking about your purpose.

When you do not have an income stream

You may have cryptoassets that do not provide an income stream or any other benefits while you hold them.

This strongly suggests you acquired them for the purpose of selling or exchanging them. This is because the only benefit you get is when you sell or exchange those cryptoassets.

*The bottom Line

You will be paying tax. The statement that it depends on why you bought or purpose really means nothing. You pay tax. The “purpose” or “intention” argument cannot be won.

WHY? Because the unassailable reality is “purpose or intention” can be challenged and rejected by IRD easily. There is too much required to prove and support the purpose or intention. It fails.

And this has history, and well experienced by me under what was then section CD1 Income tax act 1993 (now 2007). This section was the original capital gains tax- for property (real estate)…the grandfather of the Brightline test.

In that legislation the selling of a property within the 10-year period of buying came down to “what was your intention?”. No matter the truth, IRD resources prevailed. Tax is king.

Be warned!

Commonly known/recognised/understood crypto assets (just 2 of many) :

BITCOIN