Cryptocurrency might be decentralised and not rely on a bank or big financial institution, but that doesn't let you off the hook when it comes to paying tax.
It took a little while to catch up, but in recent years, the Inland Revenue Department (IRD) has cracked down on people profiting from cryptocurrency and now expects tax to be paid.
But, how do you do that when you are dealing with digital and foreign currencies?
It’s not as simple as adopting a PAYE (pay as you earn) mentality.
So, how do you make sure you stay onside with the IRD and meet your tax obligations on your cryptocurrency investments?
Well, the first step is to read this article for a basic rundown. Then, get in touch with the crypto tax experts at Wise Advice with any questions.
But first, let’s tackle the crypto tax basics.
When You Need To Pay Crypto Tax
For tax purposes, cryptocurrency is treated as property. That means you are taxed when you dispose of the property. So, when you are swapping one type of cryptocurrency for another or exchanging it for a fiat currency like NZ dollars.
If you buy cryptocurrency with the intent to sell, then you will need to tell IRD, regardless of whether you have made a profit or a loss. You can try to prove that you didn't buy the cryptocurrency with the intent to sell it, but that's quite hard and needs good evidence to back it up.
Crypto income may also come from mining crypto, staking or lending crypto assets to someone and getting interest.
How Much Tax Do You Pay?
Working out how much tax to pay on cryptocurrency can be tricky, especially if you buy and sell regularly. The crypto market is still quite volatile, so you might make a profit one month and then lose a bit the next. IRD suggests two ways of working this out.
First in first out (FIFO) - this method assumes that you sell your crypto in the same order that you bought it for the purposes of deciding profit.
Weighted average cost (WAC) - this assumes an average cost and sale price for all transactions.
You may also need to convert the cost of any held assets into NZ dollars if you are using an overseas exchange.
Don't forget that if you are running a crypto trading business your income may be classified as business income, and you may also be able to deduct associated costs. The IRD defines crypto traders as people who: have a high number of transactions, spend a lot of time managing their portfolio or work on a cryptoasset portfolio on a fairly continuous basis.
Keeping The Right Records
As with any financial transitions, you'll need to keep clear records for your tax return. These include:
The date of any transaction and the type (buy or sell)
The type of currency eg Bitcoin, Ethereum
The total number of units you hold
The value in NZD at the time of the transaction
Your wallet addresses and exchange information
It's worth noting that while IRD says you need to keep the information for seven years, many exchanges do not hold information for very long. So you should download your transaction details regularly to keep up to date.
Not Clear On Your Crypto Tax Obligations?
If you still aren't really clear on what your crypto tax obligations are, that's ok - it's complicated.
While the IRD does have information on its website, it can still be hard to make all the sums add up. And as crypto is an evolving market, it's likely, tax rules around it will also continue to evolve. In fact, there is new legislation around cryptocurrency and GST being discussed at the current time.
If you try and work it out for yourself you run the risk of overpaying, or worse, underpaying tax or not paying on time. And, because every crypto transaction is recorded in the blockchain, it's all there for inspection by IRD, so you need to ensure your transperancy. Crypto exchanges are already asked to share transaction data with IRD to help identify investors for tax purposes.
So, we recommend leaving it to the experts. Our specialist crypto accountants can make sure all your accounts are in order, and that you have the right records to back them up. We'll walk you through your tax obligations so you understand what you are paying and why.