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Transactions in cryptocurrencies
Individual investors (tax resident in your jurisdiction)
1) Are individuals taxed on gains on the sale of cryptocurrencies?
For New Zealand income tax purposes, cryptocurrency is treated as a form of intangible personal property, subject to the application of general provisions in the Income Tax Act 2007 (ITA) relating to dealing or trading in personal property.
Cryptocurrency is typically treated as ‘revenue account property’ of the holder under the ITA, meaning realised gains and losses from disposing of cryptocurrency will be taxable or deductible. Underpinning this is an Inland Revenue Department (IRD) published view that, by analogy with bullion, there is a presumption that taxpayers acquire cryptocurrency for the “dominant purpose of disposal”, because the assets typically do not provide any other income stream while held. Personal property acquired for the dominant purpose of sale or disposal is included as revenue account property.
An individual who holds cryptocurrency as revenue account property, but who is not carrying on a business of trading in cryptocurrency (a “non-business holder”) will be liable to tax on any gain on disposal (or allowed a deduction for any loss on disposal) in the tax year of disposal (whether the consideration is fiat currency, other cryptocurrency or anything else).
An individual that is a business holder of cryptocurrency would be taxed on the same basis as a corporate investor that is a business holder (discussed below at Questions 2 and 3 below).
The presumption that cryptocurrency is held for disposal is, of course, rebuttable, and in particular instances, such as in the context of certain DeFi arrangements, it may be able to be demonstrated that the taxpayer acquired the asset to access a yield. In this case, the yield will likely be taxable, but underlying capital gains may not be (unless the asset provides a fixed, specific return, known in advance of its acquisition, in which case it will be comprehensively taxed under the financial arrangement rules in the ITA).
Corporate investors (tax resident of your jurisdiction)
2) Is cryptocurrency subject to yearly mark to market valuation?
Cryptocurrency held by a corporate investor which carries on a business of trading in cryptocurrency will be classified as ‘trading stock’ (a subset of revenue account property). Cryptocurrency held as trading stock will be revalued at the lesser of cost and market selling value at each tax year end. That value is then income for that year and a deduction in the following year. This may give rise to deductions for unrealised losses in a declining market. In the tax year of disposal, the disposal proceeds will be income, with a deduction for the deemed carrying value of the cryptocurrency at the start of that year (producing a net taxable gain or deductible loss on disposal).
A corporate investor that is a non-business holder of cryptocurrency will be taxed on the same basis as an individual that is a non-business holder (discussed at Question 1 above), including the possibility of non-revenue account treatment, and application of the financial arrangement rules, in particular instances.
3) Are corporates taxed on gains on the sale of cryptocurrencies?
Generally yes, as discussed in Question 2 above.
If fiat currency paid or received for cryptocurrency is not New Zealand Dollars (NZD), for tax reporting purposes there will need to be a conversion into NZD at the exchange rate prevailing at the relevant time. If other cryptocurrency is received as consideration, it will need to be valued in NZD for the purpose of measuring any taxable gain or loss on disposal.
Common questions around cryptocurrency and tax
4) Is payment for goods/services in cryptocurrencies a taxable event?
Possibly yes. If the cryptocurrency is revenue account property or trading stock of the party providing payment, then the transaction will be a taxable event for that party producing a taxable gain or loss on disposal (as discussed in Questions 1 to 3 above). In addition, for the party receiving the payment, the receipt of the cryptocurrency as “in-kind” consideration for the provision of services as an employee (see further at Question 10) or contractor, or the taxable sale of goods, or in any other income generating transaction, will be taxable. For tax reporting purposes it will be necessary to value the cryptocurrency in NZD on payment or receipt.
5) What is the tax treatment of cryptocurrencies received from mining?
IRD has a published view that mining is generally an income-earning activity, rather than a hobby, so any mining-related fees or rewards are taxable income. For pool mining, the mining income is derived when the pool periodically distributes each miner’s share, calculated individually by reference to its NZD market value at the time of distribution.
6) What is the tax treatment of cryptocurrencies received by airdrop?
IRD also has a published view that the receipt of airdropped cryptocurrency by a business holder of cryptocurrency would likely be treated as an amount derived from the business such that its market value in NZD would be taxable on receipt. Following receipt, the airdropped cryptocurrency would form part of the business holder’s trading stock in the normal course, with a base cost equating to its market value at the time of receipt.
Non-business holders of airdropped cryptocurrency are less likely to be taxed upon receipt. However, given IRD’s general position that taxpayers acquire cryptocurrency for the purpose of disposal (as set out at 1.1(1)), disposals of airdropped cryptocurrency may be a taxable event for a non-business holder of cryptocurrency. Having said that, it may be possible for a non-business holder to show that they did not acquire airdropped cryptocurrency for the purpose of disposal – eg the taxpayer unknowingly received airdropped cryptocurrency in their existing wallet and did not do anything to claim the cryptocurrency (such as actively signing up or opting in to receive airdrops). In such a case the acquisition would arguably be a non-purposive acquisition meaning the airdropped cryptocurrency is not held on revenue account.
7) What is the tax treatment of cryptocurrency received from staking?
IRD’s published view is that staking is a consensus model (i.e., a way to achieve consensus on the blocks to add to the blockchain) and is therefore a type of cryptocurrency mining and would be taxed in the same way. See above at Question 5.
8) What is the tax treatment of lending in cryptocurrencies?
If the “lending” transaction technically involves a disposal and later reacquisition of the cryptocurrency by the “lender”, then the upfront disposal is likely to be taxed as described in Questions 1 and 2 above, with all consideration received from the borrower (including “interest” and the reconveyed cryptocurrency at maturity) taxable accordingly. If the lending transaction does not involve a disposal of the cryptocurrency by the lender, then again, the lender’s returns will be taxable either on general principles or potentially under the financial arrangement rules in the ITA.
9) What is the tax treatment of a hard fork?
The treatment for business and non-business holders would be expected to be similar to the treatment of airdropped cryptocurrency (see Question 6), except that it will likely be more difficult for a non-business holder involved in forking to establish that they did not acquire cryptocurrency derived from a fork for the dominant purpose of disposal.
10) What is the tax treatment of employee salary in cryptocurrency?
IRD has issued a public ruling to the effect that wages or salaries received in cryptocurrency (including bonuses and one-off payments) are to be treated as part of normal remuneration and will generally be subject to New Zealand’s employment income withholding tax regime – Pay As You Earn (PAYE), if it is not subject to a ‘lock-up’ period, it can be converted into a fiat currency (on an exchange), and either a significant purpose of the cryptocurrency is to function like a currency or the value of the cryptocurrency is pegged to one or more fiat currencies.
PAYE will always need to be paid in NZD fiat currency. Cryptocurrency payments that are not denominated in NZD will need to have their NZD value calculated, for PAYE purposes, at the prevailing exchange rate on the date of transfer to the employee’s wallet.
If the cryptocurrency is subject to a ‘lock-up’ period, i.e., the employee cannot convert or sell the asset for cash for a material period of time, then IRD views that payment as not sufficiently resembling a payment of salary or wages and is therefore not subject to PAYE rules. Any cryptocurrency provided as remuneration that does not have the necessary features to fall within the PAYE rules will instead be a fringe benefit subject to the Fringe Benefit Tax (FBT) rules.
11) How are gifts of cryptocurrency taxed, including in-game rewards?
New Zealand does not have a gift or inheritance tax and so there should be no tax consequences for the donee at the time of the gift. Cryptocurrency received as a gift or through in-game rewards may be taxable on disposal by the donee (with a deduction for the market value of the cryptocurrency on the date of the gift). However, a genuine donee of cryptocurrency should be able to establish that they did not acquire it for the dominant purpose of disposal, meaning disposal would not be a taxable event.
12) Is there a tax-deferral when exchanging cryptocurrency/assets?
There is no tax-deferral regime for exchanging cryptocurrency because an exchange of cryptocurrency is a disposal of the original cryptocurrency. For tax reporting purposes, the cryptocurrency received in exchange for the original cryptocurrency will need to be valued in NZD at the date of the exchange.
13) Is there any transfer tax on the acquisition of cryptocurrencies?
No.
14) Is there obligations to declare cryptocurrency to tax authorities?
There is no general declaration obligation, but any taxable transaction involving cryptocurrency will obviously need to be properly reported.
15) Are there reporting obligations for cryptocurrency transactions?
Yes. Any taxable cryptocurrency transaction will need to be reported in the ordinary tax reporting cycle.
16) How are cryptocurrency transactions treated for VAT purposes?
Cryptocurrency is deemed to be neither a “good” or “service” under the Goods and Services Tax Act 1985 (GST Act), and so the supply of cryptocurrency falls completely outside the GST regime. The GST Act also treats certain financial transactions involving or settled in cryptocurrency as GST exempt supplies. Standard GST rules apply to taxable supplies of goods or services for which the consideration is cryptocurrency.
Initial Coin Offerings or ICOS (by issuers tax residents in your jurisdiction)
17) What is the tax treatment of the ICOs for issuers?
The tax treatment of ICOs is uncertain and will depend on the particular features of the cryptocurrency. IRD suggests that a binding ruling should be obtained for certainty.
Coins issued to employees in an ICO will likely be subject to FBT.
Conceptually, if cryptocurrency is issued in order to raise funds to be invested as capital in a business, an argument could be made by the issuer that the issue of the cryptoassets in the ICO is not itself a taxable transaction for the issuer. However, if the cryptocurrency is issued in order to raise revenue, then the proceeds would be taxable. This is likely to be the position for utility tokens since utility tokens do not provide an ownership stake in the issuer but rather represent a coupon for the supply of a particular good or service.
18)What is the VAT treatment of the ICOs, including rules on vouchers?
No GST consequences.
19) Are ICOs liable to any stamp duty?
No.
Transactions in NFTs
Individual investors (tax resident in your jurisdiction)
20) What is the tax treatment for individuals of the creation of NFTs?
The income tax consequences of creating and selling NFTs would be expected to be similar to the consequences of acquiring and disposing of cryptocurrency, see above at Question 1.
Corporate investors (tax resident in your jurisdiction)
21) What is the tax treatment for corporates of the creation of NFTs?
The income tax consequences of creating and selling NFTs would be expected to be similar to the consequences of acquiring and disposing of cryptocurrency, including with regard to the distinction between business and non-business holders, see above at Questions 2 and 3.
22) Are NFTs taxed differently to cryptocurrencies?
No.
23) Can tax be deferred when exchanging NFTs for other NFTs/crypto?
No.
24) What is the tax treatment of gifted NFTs (incl. in-game rewards)?
See response at Question 11, which is also applicable to NFTs.
25) Is there any transfer tax when acquiring NFTs for consideration?
No.
26) Is it obligatory to declare NFTs to tax authorities?
See response at Question 14, which is also applicable to NFTs.
27) Are there tax reporting obligations specific to NFT transactions?
No specific obligations. The general comment above at Question 15 would also apply to transactions involving NFTs.
28) How are NFT transactions treated for VAT purposes?
As noted above at Question 4, dealings in cryptocurrencies are either disregarded or treated as exempt supplies under New Zealand’s GST Act. However, the definition of ‘cryptocurrency’ in the GST Act expressly defines cryptocurrency as a cryptoasset that is not a non-fungible token, meaning this treatment does not extend to NFTs. Consequently, transactions involving NFTs are subject to standard GST rules.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
