Many of our members are overwhelmed by the difficulty involved in accurately calculating the tax to pay on cryptocurrency. Prior to the legislation passed in March 2022, there were no specific tax rules. Crypto does not fit neatly into any particular set of tax rules, so knowing which rules applied was difficult. In addition, compliance costs are often very high relative to the amount of income.
We have been speaking to the Government about how best to address cryptocurrency taxation. Although it is not always easy to find solutions, they have taken up some of our suggestions:

Creating a definition

Tax legislation now includes a definition of cryptoassets. This is a fundamental first step in determining how they should be taxed.
The definition is broad but does not include Non-Fungible Tokens (NFTs). We think this is appropriate. NFTs are different from other cryptoassets, are not fungible, and may be enjoyed independently from any possible growth in value from ownership.

GST

Cryptoassets are now excluded from GST. This amendment has been backdated to 2009 – i.e. when cryptocurrencies were first developed. This is a powerful signal from Inland Revenue that they should probably not have been subject to GST in the first place. We do not normally agree with backdating legislation, but in this case the backdating is entirely appropriate.

It was not clear how or to what extent GST applied to cryptoassets. Prior to the legislative change, cryptoassets would probably have been defined as a “service” for GST purposes because they are property but not physical goods. In that case, a holder of crypto should have returned GST every time they made a supply of cryptocurrency.

There were other issues. If cryptoassets are a service, the GST treatment was slightly different depending on where the counterparty was located. If the counterparty was in New Zealand and the cryptoasset was classified as a “service” (but not a “financial service) for GST purposes, the supply was subject to GST at 15%. If the supply was a “financial service” the supply would be exempt. If the counterparty was overseas, the supply of both a “service” and a “financial service” would have been zero rated, meaning no GST was chargeable but the supplier could claim back GST input tax on purchases made in relation to the supply. In the case of a crypto exchange, the buyer or seller did not know the identity of the counterparty or their location. So in most cases, a New Zealand buyer or seller of cryptoassets would have no way to determine the correct GST treatment.

Therefore compliance was low. The amendment to remove cryptoassets from GST allows New Zealanders who buy and sell cryptoassets to focus on complying with their income tax obligations rather than with GST rules that are almost impossible to apply.

Debt

Inland Revenue has confirmed that cryptoassets with debt-like characteristics are subject to the financial arrangements rules, which are the rules in the Income Tax Act that govern how debt instruments are treated.

We discussed this previously with officials and requested that Inland Revenue make this clarification, so we appreciate them clarifying.

Simplified method

We also recommended that the Government introduce an optional simplification method to lower compliance costs and encourage voluntary compliance for individuals with small total investments. The Government has yet to make this change.

Many holders of cryptoassets are wage and salary earners who have limited interaction with the tax system. Many are probably unaware that they should be tracking their trades and calculating the profit on each individual sale or switch. Some are probably not even aware that they must return the income.

One option would be to allow taxpayers to account for tax on cryptoassets on an unrealised basis, valuing their portfolio at the beginning and end of the income year and paying tax on the difference. A simplified method might result in the taxpayer paying more tax in a given income year, but a significant reduction in compliance costs should offset this.

For this reason, any simplification method should be optional.

The Independent Specialist Tax Adviser to the Finance and Expenditure Committee noted that this work was needed and should become part of the Government’s tax policy work program.

We hope that the Government will add it to their tax policy work program and be able to devote resources to it before the next election.

According to Inland Revenue’s updates, further work on cryptoasset tax legislation will be conducted when resources are available.