So you promised yourself when BTC hit $100k you were going to take some profits. But how do you do this either without paying tax, or paying the least amount of tax possible.

The Basics of Crypto Tax in New Zealand

Any time you sell, trade, swap, or otherwise dispose of cryptocurrency from one token to another, a taxable event is created. The taxable amount is the difference between the value at the time of purchase and the value at the time of disposal, less any transaction fees (e.g., gas fees or payment processing fees). The total per year of all of these profits or losses add up to your taxable income from cryptocurrency which needs to be included in your tax return

This means even if you haven’t converted your cryptocurrency to fiat, any crypto-to-crypto trades or disposals could still result in tax obligations.

So how can we avoid this?

1. Hold Your Bitcoin Long-Term and Avoid Disposal

As cryptocurrency is only taxed on disposal the simple answer is to hold the majority of your Bitcoin or cryptocurrency in a separate wallet and refrain from selling, trading, or disposing of it. As long as you don't create a taxable event, no tax is due.

Then keep a smaller stash that you use for trading. You will pay tax on this, but it protects the cost base of your "HODL" stash so you’re not accidentally realising taxable income. 

Note: The property Brightline test does not apply to personal property (cryptocurrency) so under current legislation the long term stash will eventually be taxable, but this avoids accidentally realising the tax sooner.

Edit*: The purpose of holding BTC in a separate wallet is reduce the risk of accidentally trading it to fund the purchase of other tokens for trading. Instead, I would recommend separately funding those tokens so you don't impact your original BTC base. If you are trading BTC, this will impact your previous cost base, but trading any other token will not.*

2. Strategic Portfolio Rebalancing

Tax planning can also involve rebalancing your portfolio to optimise gains and losses. Near the end of the tax year, review which tokens have performed well and which have underperformed (ie those NFT’s you bought in 2021).

Disposing tokens that have a current market value less than your cost base will realise a tax deduction which will offset against taxable gains from your profitable taxable events.

Note: Avoid selling on 31 Mar and then and buying back the same tokens immediately after on 1 Apr, as this could be flagged as tax avoidance. 

3. Relocate to a Tax-Friendly Country

New Zealand taxes its residents on worldwide income, but unlike Australia, New Zealand doesn’t have an exit tax on cryptocurrency (as it isn’t considered a financial arrangement) so if you cease your NZ tax residency, and move to a low, or no tax jurisdiction you can avoid tax on cryptocurrency altogether. This is on the base you haven’t already realised taxable events as everything up until the date you leave is still taxable. 

To cease NZ residency you need to be out of the country for at least 325 days (days test) and ensure you don’t have a place of abode. Essentially you need to prove that the new country is 'home' as opposed to NZ based on the frequency and duration of your visits to NZ, family and social ties, economic interests (like investments or superannuation), employment or business connections, and your intention to return to live in NZ.

 Some crypto-friendly countries with low or no taxes on cryptocurrency include:

• Dubai (no income tax or capital gains tax)

• Portugal (no tax on individual crypto gains)

• Singapore (no capital gains tax, but business income may be taxable)

Note: You can’t just fly to one of these countries, open a bank account, and cash out your Cryptocurrency and fly home. You need to ensure you properly cease your tax residency otherwise the gains will still be taxable in NZ

4. Claim All Allowable Deductions

If you’re considered a trader due to your transactional volume there are a number of expenses you can claim to offset your taxable income so long as they directly relate to your trading activity. 

• Transaction Fees: Gas fees, exchange fees, and other transaction-related costs (note that these often form part of your cost base).

• Tools and Resources: Costs for crypto tax software, portfolio trackers, trading courses, and subscription fees for market analysis tools.

• Interest on Loans: Interest paid on loans taken specifically to purchase cryptocurrency.

• Lost Tokens: Claims for lost tokens due to scams, fraud, or lost wallets (subject to proving the loss).

• Home Office Expenses: A portion of rent, electricity, water, insurance, and internet costs if you use a home office for your trading activity.

• Depreciation: On equipment used for trading, such as computers, phones, laptops, hardware wallets etc

• Professional Fees: Costs for accounting, legal advice, and consultancy services related to your crypto investments and tax compliance.

• Education and Training: Fees for courses, certifications, or webinars directly related to improving your trading skills or understanding of the crypto market.

• Marketing and Networking Costs: Expenses for participating in crypto events, meetups, or networking groups if they relate to your trading or investment activities.

5. Set up a Company or a Trust

Moving cryptocurrency from your own name to a company or trust will realise a taxable event so it’s something to consider on any new investments. 

A company is taxed at 28% so it will save you tax in the short term, however the company owns this cryptocurrency so if you ever want to withdraw this money for personal spend you’ll need to pay out a dividend and pay the difference in tax between 28% and your marginal tax rate

A trust is taxed at 39% but does have the additional flexibility of distributing income to beneficiaries who may be in lower tax brackets.

What should my next steps be if I want to cash out, or have realised I have previous years of tax to declare?

Reach out to an Accountant - who actually knows how to deal with Crypto (there basically only about 10 who actually know how Crypto works in NZ) (Highly recommended)

or

Do it yourself

1. Compile a list of all the wallets and exchanges you have dealt with as well as all of the FIAT deposits and withdrawals that have been made

2. Import these into a tool like Koinly or CryptoTaxCalculator - all transactions from the beginning of time

3. Review for any missing transactions/wallets or missing pricing data

4. Run the tax reports for each year that you have been trading and total all these gains/losses all up in a table. Export these reports for your records

5. Confirm that FIAT deposits less withdrawals +/- your taxable income = the closing cost base of your Cryptocurrency 

6. Prepare a voluntary disclosure and submit this with IRD

7. Pay any outstanding tax due (note this will likely have interest and penalties dating back to when it was originally due)

If you have anymore than a few hundred transactions or have bought/sold NFT's, staked crypto, interacted with DeFi, Liquidity pools, airdrops, or any other money making scheme on chain or were were caught up in LUNA, FTX, Celsius, Cryptopia etc I'd highly suggest engaging an accountant to do this as it can get very complicated very quickly.

If you feel like going down a total rabbit hole of Crypto Tax give the below a read

• https://taxhawk.co.nz/insights/cryptocurrency-tax-101-what-is-taxable

• https://taxhawk.co.nz/insights/cryptocurrency-tax-102-why-is-it-taxable

• https://www.ird.govt.nz/media-releases/2024/focus-on-cryptoassets

Any questions let me know!