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Taxation of Cryptocurrency Transactions

Bitcoin and other cryptocurrencies have seen considerable growth over the last 12 months. If you own and use any crypto personally or in business, you’ve probably started investigating your potential tax obligations.

In simplest terms, cryptocurrency is money that only exists digitally or virtually. Cryptocurrency uses cryptography and blockchain technology to regulate its generation and verify fund transfers. Cryptocurrencies can be transferred between people without using an intermediary, like a bank. Cryptocurrencies can be bought peer to peer, through online exchanges or by participating in Initial Coin Offerings. Bitcoin is the most well-known cryptocurrency. However, thousands of cryptocurrencies are available in the digital market right now. Ethereum, Ripple and Litecoin are other well-known examples.

How is cryptocurrency taxed? The answer can be complicated. Many nations are looking to formalise their taxation guidelines to help people identify their tax obligations. Unite States, United Kingdom, Australia, Singapore, and Japan have already issued formal tax regulations.

In New Zealand, the Inland Revenue (IRD) has published a Q&A on the income tax treatment of cryptocurrencies. According to the IRD, for tax purposes, cryptocurrency is property, not currency. This means foreign currency gain or loss provisions do not apply. They also say that cryptocurrency received as payment for goods or services is business income, which is taxable. This is seen as a barter transaction and you’ll need to calculate the value of the cryptocurrency in New Zealand Dollars (NZD) at the time it’s received. For some ‘alt coins’ (cryptocurrency other than Bitcoin) it may be necessary to convert into US dollars, or any other fiat currency, and then convert into NZD.

The IRD says Bitcoin and similar cryptocurrencies generally don’t produce an income stream or provide any benefits, except when they’re sold or exchanged. This strongly suggests that cryptocurrencies are generally acquired with the purpose to sell or exchange them. So, for income tax purposes, cryptocurrencies have similar characteristics to gold bullion. Recently, the IRD issued an Issues Paper for public consultation on the issue of whether remuneration paid to an employee in cryptocurrency is subject to PAYE or FBT.

The answer is not so clear and hence the Issues Paper seeks your feedback on IRD’s initial views on how the tax laws apply. The IRD’s initial view is that, where an employee is paid part of their regular remuneration in cryptocurrency, this will be subject to PAYE. As such the FBT rules will not apply.

The IRD has been working on reaching a more definite view on a number of technical issues and is likely to issue more detailed information along with potential amendments to the tax legislation. In the meantime, there is still considerable uncertainty as to the tax treatment of cryptocurrencies as the current law does not easily accommodate these assets and the IRD has only released general guidelines so far.

If you haven’t got your tax right, let us know as soon as you can so it can be corrected. We can advise you on the current legal position and let you consider making a voluntary disclosure to the IRD if necessary.

Ismail Rasheed, the owner of IR Legal, is a specialist tax lawyer with 18 years’ experience.

Phone (04) 566 1155 | (09) 299 1155 | Email: office@irlegal.lawyer | www.irlegal.lawyer

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