Background
Over the last couple of months I've seen some creative reasoning's on forums regarding the tax treatment of gains/losses on Cryptocurrency. There is no Cryptocurrency specific tax legislation so the current legislation needs to be applied to fit Cryptocurrency
NZ has no capital gains tax so no tax on Crypto
Crypto is property therefore subject to Brightline so no tax on Crypto if you hold for 2+ years
Crypto is a hobby so no tax on Crypto
No tax on shares so no tax on Crypto
No tax on BTC ETF so no tax on Crypto
No tax if I just do P2P/Wirex
1. How is Crypto for Tax Purposes?
New Zealand does not have a broad capital gains tax regime like many other countries, however some gains are taxed as income or trading profits.
A recent New Zealand High Court case - Ruscoe v Cryptopia Ltd (in liq) [2020] NZHC 728 confirmed that crypto assets are property. Note this personal property, which is separate from land.
The Court said, citing a British case from 1965, that property was something that:
is definable
is identifiable by third parties
is capable of assumption by third parties, and
has some degree of permanence or stability.
and that cryptocurrency met these criteria.
2. How is Property Treated under Current Legislation
There are only two sections in the Income Tax Act that deal with Cryptocurrency as below. The main one that 99% of people will fall under is CB4
Personal property
CB 4 - Personal property acquired for purpose of disposal
An amount that a person derives from disposing of personal property is income of the person if they acquired the property for the purpose of disposing of it.
CB 5 - Business of dealing in personal property
An amount that a person derives from disposing of personal property is income of the person if their business is to deal in property of that kind.
This section It doesn’t mention anything about making profit, or gains – it is an ‘intention to disposal’ that is key. The purchaser’s state of mind must be considered at the time of
acquisition (not at the time of disposal) and purpose of disposal must be the dominant
purpose.
Disposal - A disposal includes:
Using cryptocurrency for an intended use (such as disposing a utility token)
Swapping the token for another token or back to fiat
Gifting the token to someone else
A method to remove your ownership (burning etc)
Inland Revenue’s had previously provided guidance that
“Just like with property - when you acquire cryptocurrency for the purpose of selling or exchanging it, the proceeds you make from selling it are taxable."
“The purpose is hard to argue here since with Bitcoin and other cryptocurrencies, generally the only time they produce an income is when they change hands.”
Dominant purpose test - Obviously, determining a person’s purpose is subjective. The taxpayer therefore has an onus of proof to establish to the balance of probabilities that the Cryptocurrency was not acquired for the dominant purpose of sale or another disposal and that this needs to be supported by clear and compelling evidence
Because of Inland Revenue's default position, the onus will be on the taxpayer to prove otherwise. The surrounding circumstances, as indicated by Inland Revenue, can be:
the circumstances surrounding the acquisition of the Cryptocurrency , its use, and its disposal;
the nature of the crypto (whether it provides an income stream or any other benefits while held)
the number of similar transactions
the length of time the crypto is held
Generally, Cryptocurrency does not offer returns on investments while holding (other than staking for example through a DeFi protocol), but as a general rule, the intent on purchase of Cryptocurrency is for this future gain.
Comparison with Gold - Inland Revenue has also previously compared that tat treatment of Cryptocurrency to gold. Because gold is not capable in and of itself of producing income, it is presumed to be acquired for sale. However Inland Revenue has also noted that there may be circumstances that the dominant purpose may be held otherwise as below
In most cases, gold purchased in bullion form will be purchased for the dominant purpose of disposal. However, there may sometimes be situations where the Commissioner may accept that the dominant purpose in acquiring gold bullion was to retain it for reasons other than eventual disposal. For example, there may be circumstances where bullion is acquired for the dominant purpose of building up a diversified portfolio of property that the person will not necessarily realise, or as a long-term investment that the person will not necessarily realise. In such circumstances it may be that the taxpayer can show that the bullion was not purchased with the dominant purpose of disposal. [QB 17/08: 20 September 2017]
Comparison with Share Investments - Contrast this with a share investment, where the dominant goal might be to derive dividend income, or to hedge against long term inflation.
Usually for share investment to be taxable this falls under CB 5 as a 'Share Trader'. Facts to determine this can include:
Showing a pattern of (usually frequent) buying and selling of shares over time
Investing significant levels of capital in investments, in particular when investing on margin / borrowing to invest
Monitoring their investment portfolios closely, perhaps using an advanced online trading platform
Spending a lot of time researching their investments
Buying high risk shares to flip at a profit (most if not all Cryptocurrency would fall under this)
Ultimately the tax treatment will depend on the individual’s specific facts and circumstances for acquiring cryptocurrencies.
Where it may not be Taxable - There may be limited cases where the sale of Cryptocurrency is not taxable. A few are listed below
Cryptocurrency received as a gift (no intention at acquisition)
Cryptocurrency received from a hardfork if passively acquired (no intention at acquisition)
Cryptocurrency received from an airdrop if passively acquired (in some circumstances)
Cryptocurrency acquired solely for the purpose of staking income (or other revenue deriving purposes) and this is documented form the beginning and the activities of the transactions accurately reflect this - ie the Cryptocurrency was staked immediately after acquiring
3. Cryptocurrency Tax Myths
Q1: NZ has no capital gains tax so no tax on Crypto
New Zealand does not have a broad capital gains tax regime like many other countries, however gains are still taxed as income or trading profits. See CB 4
Q2: Crypto is property therefore subject to Brightline so no tax on Crypto if you hold for 2+ years
Although Cryptocurrency is classified as personal property, this is separate from Land which has the Bright-line provision and therefore does not apply. See CZ 39
Q3: Crypto is a hobby so no tax on Crypto
Inland Revenue classes a hobby as an activity done mainly for “pleasure or enjoyment in your spare time” See IRD
If the activities are systematic, organised, and carried out with the intention of making a profit, they are likely to be considered a business and therefore taxable. If the activities are sporadic, lack a profit-making intention, and are more akin to a pastime or form of recreation, they may be considered a hobby. Most people in Crypto would be trying to make a profit
Q4: No tax on shares so no tax on Crypto
Share investments have been around a long time and have many years of case law and arguments regarding the taxability of them - See page 33 from TIB Vol 4 No 5 (1992) for example
Most share investments can pay dividends, and also have relatively stable growth which allows an alternative purpose to hedge against inflation. Cryptocurrency only has dividend like abilities through Staking and has a much higher volatility so these exemptions would not apply
Q5: No tax on BTC ETF so no tax on Crypto
This is interesting - lets take a look at the various methods
Q6: No tax if I just do P2P/Wirex
It's still taxable, it may just be harder for Inland Revenue to trace
4. Conclusion
In Conclusion, your Cryptocurrency is probably taxable. See https://www.taxhawk.co.nz/post/crypto101 to see what specifically is taxable, when its due, and if you should get an accountant to do this for (the answer is probably yes)
Background
Over the last couple of months I've seen some creative reasoning's on forums regarding the tax treatment of gains/losses on Cryptocurrency. There is no Cryptocurrency specific tax legislation so the current legislation needs to be applied to fit Cryptocurrency
NZ has no capital gains tax so no tax on Crypto
Crypto is property therefore subject to Brightline so no tax on Crypto if you hold for 2+ years
Crypto is a hobby so no tax on Crypto
No tax on shares so no tax on Crypto
No tax on BTC ETF so no tax on Crypto
No tax if I just do P2P/Wirex
1. How is Crypto for Tax Purposes?
New Zealand does not have a broad capital gains tax regime like many other countries, however some gains are taxed as income or trading profits.
A recent New Zealand High Court case - Ruscoe v Cryptopia Ltd (in liq) [2020] NZHC 728 confirmed that crypto assets are property. Note this personal property, which is separate from land.
The Court said, citing a British case from 1965, that property was something that:
is definable
is identifiable by third parties
is capable of assumption by third parties, and
has some degree of permanence or stability.
and that cryptocurrency met these criteria.
2. How is Property Treated under Current Legislation
There are only two sections in the Income Tax Act that deal with Cryptocurrency as below. The main one that 99% of people will fall under is CB4
Personal property
CB 4 - Personal property acquired for purpose of disposal
An amount that a person derives from disposing of personal property is income of the person if they acquired the property for the purpose of disposing of it.
CB 5 - Business of dealing in personal property
An amount that a person derives from disposing of personal property is income of the person if their business is to deal in property of that kind.
This section It doesn’t mention anything about making profit, or gains – it is an ‘intention to disposal’ that is key. The purchaser’s state of mind must be considered at the time of
acquisition (not at the time of disposal) and purpose of disposal must be the dominant
purpose.
Disposal - A disposal includes:
Using cryptocurrency for an intended use (such as disposing a utility token)
Swapping the token for another token or back to fiat
Gifting the token to someone else
A method to remove your ownership (burning etc)
Inland Revenue’s had previously provided guidance that
“Just like with property - when you acquire cryptocurrency for the purpose of selling or exchanging it, the proceeds you make from selling it are taxable."
“The purpose is hard to argue here since with Bitcoin and other cryptocurrencies, generally the only time they produce an income is when they change hands.”
Dominant purpose test - Obviously, determining a person’s purpose is subjective. The taxpayer therefore has an onus of proof to establish to the balance of probabilities that the Cryptocurrency was not acquired for the dominant purpose of sale or another disposal and that this needs to be supported by clear and compelling evidence
Because of Inland Revenue's default position, the onus will be on the taxpayer to prove otherwise. The surrounding circumstances, as indicated by Inland Revenue, can be:
the circumstances surrounding the acquisition of the Cryptocurrency , its use, and its disposal;
the nature of the crypto (whether it provides an income stream or any other benefits while held)
the number of similar transactions
the length of time the crypto is held
Generally, Cryptocurrency does not offer returns on investments while holding (other than staking for example through a DeFi protocol), but as a general rule, the intent on purchase of Cryptocurrency is for this future gain.
Comparison with Gold - Inland Revenue has also previously compared that tat treatment of Cryptocurrency to gold. Because gold is not capable in and of itself of producing income, it is presumed to be acquired for sale. However Inland Revenue has also noted that there may be circumstances that the dominant purpose may be held otherwise as below
In most cases, gold purchased in bullion form will be purchased for the dominant purpose of disposal. However, there may sometimes be situations where the Commissioner may accept that the dominant purpose in acquiring gold bullion was to retain it for reasons other than eventual disposal. For example, there may be circumstances where bullion is acquired for the dominant purpose of building up a diversified portfolio of property that the person will not necessarily realise, or as a long-term investment that the person will not necessarily realise. In such circumstances it may be that the taxpayer can show that the bullion was not purchased with the dominant purpose of disposal. [QB 17/08: 20 September 2017]
Comparison with Share Investments - Contrast this with a share investment, where the dominant goal might be to derive dividend income, or to hedge against long term inflation.
Usually for share investment to be taxable this falls under CB 5 as a 'Share Trader'. Facts to determine this can include:
Showing a pattern of (usually frequent) buying and selling of shares over time
Investing significant levels of capital in investments, in particular when investing on margin / borrowing to invest
Monitoring their investment portfolios closely, perhaps using an advanced online trading platform
Spending a lot of time researching their investments
Buying high risk shares to flip at a profit (most if not all Cryptocurrency would fall under this)
Ultimately the tax treatment will depend on the individual’s specific facts and circumstances for acquiring cryptocurrencies.
Where it may not be Taxable - There may be limited cases where the sale of Cryptocurrency is not taxable. A few are listed below
Cryptocurrency received as a gift (no intention at acquisition)
Cryptocurrency received from a hardfork if passively acquired (no intention at acquisition)
Cryptocurrency received from an airdrop if passively acquired (in some circumstances)
Cryptocurrency acquired solely for the purpose of staking income (or other revenue deriving purposes) and this is documented form the beginning and the activities of the transactions accurately reflect this - ie the Cryptocurrency was staked immediately after acquiring
3. Cryptocurrency Tax Myths
Q1: NZ has no capital gains tax so no tax on Crypto
New Zealand does not have a broad capital gains tax regime like many other countries, however gains are still taxed as income or trading profits. See CB 4
Q2: Crypto is property therefore subject to Brightline so no tax on Crypto if you hold for 2+ years
Although Cryptocurrency is classified as personal property, this is separate from Land which has the Bright-line provision and therefore does not apply. See CZ 39
Q3: Crypto is a hobby so no tax on Crypto
Inland Revenue classes a hobby as an activity done mainly for “pleasure or enjoyment in your spare time” See IRD
If the activities are systematic, organised, and carried out with the intention of making a profit, they are likely to be considered a business and therefore taxable. If the activities are sporadic, lack a profit-making intention, and are more akin to a pastime or form of recreation, they may be considered a hobby. Most people in Crypto would be trying to make a profit
Q4: No tax on shares so no tax on Crypto
Share investments have been around a long time and have many years of case law and arguments regarding the taxability of them - See page 33 from TIB Vol 4 No 5 (1992) for example
Most share investments can pay dividends, and also have relatively stable growth which allows an alternative purpose to hedge against inflation. Cryptocurrency only has dividend like abilities through Staking and has a much higher volatility so these exemptions would not apply
Q5: No tax on BTC ETF so no tax on Crypto
This is interesting - lets take a look at the various methods
Q6: No tax if I just do P2P/Wirex
It's still taxable, it may just be harder for Inland Revenue to trace
4. Conclusion
In Conclusion, your Cryptocurrency is probably taxable. See https://www.taxhawk.co.nz/post/crypto101 to see what specifically is taxable, when its due, and if you should get an accountant to do this for (the answer is probably yes)
Background
Over the last couple of months I've seen some creative reasoning's on forums regarding the tax treatment of gains/losses on Cryptocurrency. There is no Cryptocurrency specific tax legislation so the current legislation needs to be applied to fit Cryptocurrency
NZ has no capital gains tax so no tax on Crypto
Crypto is property therefore subject to Brightline so no tax on Crypto if you hold for 2+ years
Crypto is a hobby so no tax on Crypto
No tax on shares so no tax on Crypto
No tax on BTC ETF so no tax on Crypto
No tax if I just do P2P/Wirex
1. How is Crypto for Tax Purposes?
New Zealand does not have a broad capital gains tax regime like many other countries, however some gains are taxed as income or trading profits.
A recent New Zealand High Court case - Ruscoe v Cryptopia Ltd (in liq) [2020] NZHC 728 confirmed that crypto assets are property. Note this personal property, which is separate from land.
The Court said, citing a British case from 1965, that property was something that:
is definable
is identifiable by third parties
is capable of assumption by third parties, and
has some degree of permanence or stability.
and that cryptocurrency met these criteria.
2. How is Property Treated under Current Legislation
There are only two sections in the Income Tax Act that deal with Cryptocurrency as below. The main one that 99% of people will fall under is CB4
Personal property
CB 4 - Personal property acquired for purpose of disposal
An amount that a person derives from disposing of personal property is income of the person if they acquired the property for the purpose of disposing of it.
CB 5 - Business of dealing in personal property
An amount that a person derives from disposing of personal property is income of the person if their business is to deal in property of that kind.
This section It doesn’t mention anything about making profit, or gains – it is an ‘intention to disposal’ that is key. The purchaser’s state of mind must be considered at the time of
acquisition (not at the time of disposal) and purpose of disposal must be the dominant
purpose.
Disposal - A disposal includes:
Using cryptocurrency for an intended use (such as disposing a utility token)
Swapping the token for another token or back to fiat
Gifting the token to someone else
A method to remove your ownership (burning etc)
Inland Revenue’s had previously provided guidance that
“Just like with property - when you acquire cryptocurrency for the purpose of selling or exchanging it, the proceeds you make from selling it are taxable."
“The purpose is hard to argue here since with Bitcoin and other cryptocurrencies, generally the only time they produce an income is when they change hands.”
Dominant purpose test - Obviously, determining a person’s purpose is subjective. The taxpayer therefore has an onus of proof to establish to the balance of probabilities that the Cryptocurrency was not acquired for the dominant purpose of sale or another disposal and that this needs to be supported by clear and compelling evidence
Because of Inland Revenue's default position, the onus will be on the taxpayer to prove otherwise. The surrounding circumstances, as indicated by Inland Revenue, can be:
the circumstances surrounding the acquisition of the Cryptocurrency , its use, and its disposal;
the nature of the crypto (whether it provides an income stream or any other benefits while held)
the number of similar transactions
the length of time the crypto is held
Generally, Cryptocurrency does not offer returns on investments while holding (other than staking for example through a DeFi protocol), but as a general rule, the intent on purchase of Cryptocurrency is for this future gain.
Comparison with Gold - Inland Revenue has also previously compared that tat treatment of Cryptocurrency to gold. Because gold is not capable in and of itself of producing income, it is presumed to be acquired for sale. However Inland Revenue has also noted that there may be circumstances that the dominant purpose may be held otherwise as below
In most cases, gold purchased in bullion form will be purchased for the dominant purpose of disposal. However, there may sometimes be situations where the Commissioner may accept that the dominant purpose in acquiring gold bullion was to retain it for reasons other than eventual disposal. For example, there may be circumstances where bullion is acquired for the dominant purpose of building up a diversified portfolio of property that the person will not necessarily realise, or as a long-term investment that the person will not necessarily realise. In such circumstances it may be that the taxpayer can show that the bullion was not purchased with the dominant purpose of disposal. [QB 17/08: 20 September 2017]
Comparison with Share Investments - Contrast this with a share investment, where the dominant goal might be to derive dividend income, or to hedge against long term inflation.
Usually for share investment to be taxable this falls under CB 5 as a 'Share Trader'. Facts to determine this can include:
Showing a pattern of (usually frequent) buying and selling of shares over time
Investing significant levels of capital in investments, in particular when investing on margin / borrowing to invest
Monitoring their investment portfolios closely, perhaps using an advanced online trading platform
Spending a lot of time researching their investments
Buying high risk shares to flip at a profit (most if not all Cryptocurrency would fall under this)
Ultimately the tax treatment will depend on the individual’s specific facts and circumstances for acquiring cryptocurrencies.
Where it may not be Taxable - There may be limited cases where the sale of Cryptocurrency is not taxable. A few are listed below
Cryptocurrency received as a gift (no intention at acquisition)
Cryptocurrency received from a hardfork if passively acquired (no intention at acquisition)
Cryptocurrency received from an airdrop if passively acquired (in some circumstances)
Cryptocurrency acquired solely for the purpose of staking income (or other revenue deriving purposes) and this is documented form the beginning and the activities of the transactions accurately reflect this - ie the Cryptocurrency was staked immediately after acquiring
3. Cryptocurrency Tax Myths
Q1: NZ has no capital gains tax so no tax on Crypto
New Zealand does not have a broad capital gains tax regime like many other countries, however gains are still taxed as income or trading profits. See CB 4
Q2: Crypto is property therefore subject to Brightline so no tax on Crypto if you hold for 2+ years
Although Cryptocurrency is classified as personal property, this is separate from Land which has the Bright-line provision and therefore does not apply. See CZ 39
Q3: Crypto is a hobby so no tax on Crypto
Inland Revenue classes a hobby as an activity done mainly for “pleasure or enjoyment in your spare time” See IRD
If the activities are systematic, organised, and carried out with the intention of making a profit, they are likely to be considered a business and therefore taxable. If the activities are sporadic, lack a profit-making intention, and are more akin to a pastime or form of recreation, they may be considered a hobby. Most people in Crypto would be trying to make a profit
Q4: No tax on shares so no tax on Crypto
Share investments have been around a long time and have many years of case law and arguments regarding the taxability of them - See page 33 from TIB Vol 4 No 5 (1992) for example
Most share investments can pay dividends, and also have relatively stable growth which allows an alternative purpose to hedge against inflation. Cryptocurrency only has dividend like abilities through Staking and has a much higher volatility so these exemptions would not apply
Q5: No tax on BTC ETF so no tax on Crypto
This is interesting - lets take a look at the various methods
Q6: No tax if I just do P2P/Wirex
It's still taxable, it may just be harder for Inland Revenue to trace
4. Conclusion
In Conclusion, your Cryptocurrency is probably taxable. See https://www.taxhawk.co.nz/post/crypto101 to see what specifically is taxable, when its due, and if you should get an accountant to do this for (the answer is probably yes)
