Cryptocurrency Tax Update March 2019
Reading Time: 4 minutes

Cryptocurrency Tax Update March 2019

Overview

Cryptocurrency tax is currently being reviewed by IRD and different tax interpretations, such as financial arrangements are being applied and discussed. Financial arrangement tax treatment may apply to some cryptocurrency tokens and will depend on the specific characteristic of each individual token.

We have summarised cryptocurrency tokens into four distinct categories and discussed how financial arrangement tax treatment would apply to each category of token. Each tax payer’s wider cryptocurrency activity also needs to be considered when interpreting their overall position. Individualised specific advice is recommended.

IRD have maintained the position that cryptocurrencies have no special tax rules and existing legislation will apply. They do concede the technology is both novel and rapidly evolving and the application can be difficult.

We do not expect any material changes to our calculation methods provided that the taxpayers are cash basis holders and their cryptocurrency portfolio has a market value of less than $1m throughout the entire year and the unrealised gains or losses are less than $40k pa.

There could be changes to those who hold cryptocurrency on capital account. Financial arrangements make no distinction between capital and revenue, and the increase in the value of capital tokens could be taxable income.

These guidelines have not been published by IRD yet. This is only our interpretation and opinion. We will also be providing feedback to IRD on the proposed changes.

 

Cryptocurrency Tax update march 2019

 

Four categories of cryptocurrency tokens:

1. Intrinsic tokens

These tokens are not backed by anything and do not provide the holder with any rights; they are used as an exchange for money, goods, services and other cryptocurrencies. They can also be held as a speculative investment. Examples include Bitcoin, Litecoin, Dash and Bitcoin Cash.

We have previously discussed the tax treatment of intrinsic tokens and how taxable profits or losses are calculated.

2. Utility tokens

Utility tokens provide rights to access, operate, use or control a platform or other property or service. The token holder involves an agreement between the token issuer and the token holder that the token may be used as payment or provide access rights to services in the future. It is arguable that this could meet the requirements of a financial arrangement. Examples of utility coins are filecoin, NEO, or EOS.

Under financial arrangement rules both the trading income and unrealised gains or losses would be included as taxable income for the taxpayer. Unrealised gains and losses can be calculated using different methods but must be applied consistently across all financial arrangements. The calculation methods are beyond the scope of this article, however, there is a market valuation method where the closing market value can be accurately measured at the end of the financial period.

For example, John buys 2 ABC token for $100 each ($200 total), then sells 1 for $150. At the end of the financial year, the remaining ABC token is worth $175. John’s trading profit is $50, and unrealised profit is $75 resulting in combined taxable income of $125 for the year. Trading losses and unrealised losses are allowed as deductible expenditure.

3. Asset tokens

Asset tokens are like utility tokens, except they are backed by an underlying external, tradeable asset such as fiat currency, precious metals or real estate. An example is Goldmint. If an asset token gives rights to an underlying commodity in the future it may be a financial arrangement.

Asset tokens that derive value from an underlying asset but are not redeemable for the asset are not financial arrangements, (such as a stable intrinsic token).

If asset tokens are financial arrangements, they would be taxed like the utility token example outlined above.

4. Security tokens

Security tokens represent ownership or control of a financial asset. These can be viewed as owning a share or debt owed. They give rights to income (interest or dividends). An example is tZERO. Because they provide a future right or payment, they are likely to be considered financial arrangements. This is because there is an agreement between the issuer and the holder that the holder will provide “money” to acquire the token and will receive rights to “money” in the future.

Security tokens are financial assets and we calculate the profits and losses under financial arrangement rules.

 

Why are cryptocurrency tokens considered financial arrangements?

  • There is an agreement or understanding between the holder and token issuer;
  • The holder provides money (fiat currency or cryptocurrency) to the token issuer (or another seller) to acquire the token; and
  • The token provides the holder with rights to acquire services in the future from the token issuer.
  • The holder is paying money now to receive the token that can be used in the future to acquire services.

 

How are financial arrangements taxed?

  • They require taxpayers to account for unrealised gains or losses over the term of the arrangement.
  • Financial arrangements disregard any distinction between capital and revenue, and
  • There is a wash-up calculation (base price adjustment) when the rights and the obligations cease or when the tokens are disposed of.

 

Cash basis person

A cash basis person is not required to apply a spreading method to a financial arrangement unless an election is made to do so.

There are two aspects to the criteria to be a cash basis person:

Firstly:

  • Income and expenditure under all financial arrangements for the income year does not exceed $100,000 or
  • The value of all financial arrangements on every day of the income year does not exceed $1m.

Secondly, in addition to satisfying one of the above prescribe values threshold,

  • The difference between the accrual (unrealised basis) and cash basis cannot exceed $40k for the income year.

With large fluctuations in cryptocurrency prices, some taxpayers will become subject to financial arrangement tax rules if their unrealised gain or loss is more than $40k pa.

 

Practical recommendations:

  1. Classify your cryptocurrency into the four categories
  2. Understand the type of token you are purchasing.
  3. Be consistent in applying the same tax treatment to each classification of cryptocurrency
  4. Get advice early based on your individual circumstances
  5. If you are holding coins on capital account, consider that if cryptocurrency is taxed under the financial arrangement rules all increase in value will be taxable income.
  6. Calculate your 2019 tax obligation early, so you are aware of your tax position and upcoming tax obligations.

 

Contact Tim Doyle, of AgBiz Accountants, today for a no obligation phone call or meeting on 07 823 4980 or email Tim. Our office is in Cambridge, NZ, but distance is no problem. We have many international and national clients.

 


This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Crypto Tax
Reading Time: 2 minutes

Tax Effect of Stolen Crypto: Cryptopia’s recent hack

Last updated: 25/01/2019

Unfortunately, many people held crypto on the Cryptopia exchange while it was hacked. This article outlines the tax effect of stolen crypto should the crypto not be recovered.

If you’ve lost crypto in the recent Cryptopia hack you may be able to write off any stolen crypto for tax purposes. This could result in a tax refund (or reduce your existing tax to pay).

If you purchased cryptocurrency for the intention of disposal, the gains/losses are treated as taxable income. IRD requires taxpayers to calculate their trading profits and declare their cryptocurrency activity through an income tax return.

From a trader’s perspective, cryptocurrency held for trading is consider “trading stock”. Therefore, it is subject to the trading stock rules as defined by the Income Tax Act 2007.

At year-end, any unsold cryptocurrency is recorded as closing stock (income). If you lost crypto during the hack, you may not have any closing stock, but still have a tax-deductible purchase cost from the original acquisition.

 

Tax Deductions

 

An Example

John purchases 2 ABC tokens for $2,000 from Cryptopia. He sells 1 ABC for $1,200 (and takes the profits off Cryptopia into a separate bank account). The remaining 1 ABC stays on the exchange and is stolen in the hack. John purchased the original 1 ABC token for $1,000 and its market value when stolen was $1,200.

 

What are the Tax Implications?

John’s activity can be summarised as follows:

Sales$1,200the sale of 1 ABC at the time of sale
Purchases$2,000the original purchase of 2 ABC for $2,000
Closing Stock$0none – because it was stolen
Gross Profit/(Loss)($800)loss – able to be offset against other income

In summary, John has made a profit of $200 on the disposal of his 1 ABC (sold for $1,200 and purchased for $1,000) but has then lost $1,000 (his remaining 1 ABC token) in the hack. Therefore $200 – $1,000 = -$800 overall loss.

 

…But, John Actually Lost $1,200

The market value of the ABC at the time it was stolen was $1,200. For tax purposes, John’s loss is $800 (as outlined above), however, his actual financial loss is $1,200. This was the market value of the 1 ABC token at the time.

The full $1,200 is not tax deductible for two reasons:

  1. The $200 increase from the cost of $1,000 to $1,200 has not been recorded as taxable income. Therefore, it cannot be a taxable loss as it has not been realised for tax purposes.
  2. The $200 profit on the disposal of the first 1 ABC is considered which reduces the overall tax loss.

 

For information on non-taxable cryptocurrency gains, please see our other article.


 

AgBiz Accountants are Chartered Accountants who prepare financial statements and income tax returns that involve cryptocurrency. They provide personalised tax advice to your individual circumstances. Contact Tim Doyle (tim@agbizaccountants.co.nz) for a no obligation call or meeting to discuss any crypto tax or accounting questions.

 


Disclaimer: The above references an opinion and has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. The opinions expressed by the author do not represent the opinion of BitPrime.

 

Last updated: 25/01/2019

Non-Taxable Cryptocurrency Gains
Reading Time: 4 minutes

Non-Taxable Cryptocurrency Gains

Inland Revenue’s position is that gains on cryptocurrency are taxable if they were acquired for the purpose of disposal (selling or exchanging). Furthermore, their default position is that cryptocurrency is acquired for the purpose of disposal.

“Bitcoin and similar cryptocurrencies generally don’t produce an income stream or provide any benefits, except when they’re sold or exchanged. This strongly suggests that cryptocurrencies are generally acquired with the purpose to sell or exchange them.”

The article below looks at a potential activity where cryptocurrency is not acquired for disposal and therefore any increase in the value of the cryptocurrency may be of a tax-free capital nature.

We also outline potential risks to be aware of.

We have been expecting further IRD guidelines on cryptocurrency, covering these examples. We’re aware that IRD are currently undergoing a significant IT upgrade and are considering many proposals from the tax working group (TWG), consuming a large portion of their internal resources.

 

Cryptocurrency acquired for purpose of earning rewards

If cryptocurrency is acquired for the purposes of earning a reward, the cryptocurrency may be held on capital account. This is a similar tax principle to acquiring a share of a company, for the purpose of earning a dividend. If shares are later disposed of, any increase or decrease in the share value is normally considered to be tax-free. The dividend is taxable income.

Historically, the same tax principle applies to rental properties; where a house is acquired for the purpose of earning rental income. The increase in the value of the house is tax-free capital gain, and the rental income is taxable. The bright-line test has now created some modifications to this principle.

Some examples relating to cryptocurrency include:

  1. Purchasing NEO for the purpose of receiving GAS rewards
  2. Accumulating a coin to create a master node for the purpose of earning rewards (from providing the service of the master node). E.g., holding 1,000 DASH

In both examples above, the purpose of acquiring the cryptocurrency has not been to dispose of, but to earn a reward. If NEO’s value went from $15 to $1,500 per coin, the increase in the value may be tax-free. Likewise, if DASH went from $210 to $2,000 per coin, the increase in the value may be tax-free, because it was acquired for the purpose of earning rewards from the master node.

 

Risks to be aware of

1. Intention and actual actions:

It is not sufficient to document your intention and then change your intended activity. For example, if you purchase NEO with the intention to earn GAS (capital nature), but then notice NEO price increasing and you trade it; then your activity has been different from your intention.

Our discussions with IRD suggest that if a capital position is taken, NEO would be held in a NEO wallet where the rewards are received.

We realise this creates several questions such as:

  • How long do I need to hold it for?
  • What if I have an emergency and need to sell it?
  • What happens if I change my mind?
  • What if I start accumulating coins to hold a master node, but never actually get to the point of creating the masternode and dispose of them?

All the factors need to be considered as a collective whole of the taxpayers’ activity. There is no one size fits all approach.

Example 1.

John has purchased 5,000 NEO because he wants to receive a reward. It is the only coin in his cryptocurrency portfolio. He holds it in a wallet for 18 months receiving GAS rewards. He has declared his GAS rewards as taxable income in his tax returns. After 18 months, John decides to sell his NEO to buy a house. The price of NEO has increased significantly during this time. In this situation, we believe there is evidence to support a tax-free capital position for his NEO.

Example 2.

Mary has purchased 5,000 NEO and has a wider trading portfolio. She swing trades, often holding different cryptocurrency’s for varying lengths of time and sells when the price increases. She holds her NEO part in wallets, part on exchanges, occasionally receiving GAS rewards. After 18 months, Mary decides to sell her NEO now the price has increased. It is likely that the increase in the value of her NEO will be taxable as although she has received GAS, her intention was to ultimate dispose and realise gains.

 

2. Capital losses are not tax-deductible

If an increase in the value of a capital asset is not taxable, then any decrease in value is not tax-deductible.

If you are unsure if your cryptocurrency is going to hold its value or if it has the potential to be wiped out (we do get asked this ‘worst case’ position frequently), holding cryptocurrency on revenue account (taxable gains, and tax-deductible losses), may hedge against this risk.

 

3. Making investment decisions purely from a tax perspective

Tax influences people’s behaviour. We recommend that the tax considerations only be considered in conjunction with an individual’s wider decision-making progress. Some investors are very negative about paying tax and fixated on tax-free gains. They would often be better off making more profit and paying tax.

 

4. Introduction of Capital Gains Tax (CGT)

If the labour government is re-elected, it is highly likely there will be some form of CGT. This would most likely be introduced from 1 April 2021. Unlike other OECD countries, early tax working group documents suggest the tax rate would be at marginal income tax rates (i.e., 33% for income above $70k pa compared to a flat 15% rate). It also suggests a valuation would occur on 1 April 2021 and apply on all assets owned at that point in time (compared to Australia, where there are is still property being sold now outside the capital gains net because it was acquired pre-introduction of CGT).

CGT will likely result in all increases in non-personal property being taxed. For cryptocurrency, this means that gains would be taxable income, even if it meets the ‘capital’ standard outlined above.

Book a no obligation chat with Tim Doyle today to discuss if this is appropriate for you. Or feel free to email tim@agbizaccountants.co.nz to discuss any other cryptocurrency tax related matters.

 


This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

 

Last updated: 22/11/2018

cryptocurrency and taxes in new zealand, are cryptocurrency profits taxable
Reading Time: 3 minutes

Tax Differences: Trading vs Holding Cryptocurrency

Are Cryptocurrency Profits Taxable?
What’s the Deal with Cryptocurrency and Taxes in New Zealand?

BitPrime is often asked about cryptocurrency and taxes in New Zealand. Are cryptocurrency profits taxable? This article explores tax differences between those who actively trade cryptocurrency (in business) and those who buy to hold (holders).

Profits from both activities (trading and holding) will generally be taxable. However, each activity has different accounting and tax treatment. For example, traders who purchased crypto at peak prices (October to December 2017), may be able to claim a tax-deduction for unrealised losses using closing stock accounting treatment. This may reduce profitability and subsequently any tax to pay.

For background cryptocurrency tax reading, IRD have published guidelines outlining that profits from cryptocurrency usually are taxable income. Additionally, AgBiz Accountants (Now Evans Doyle Accountants) published in March 2018, our end of year crypto tax guide that describes the underlying tax and accounting principles that apply to cryptocurrency (along with many examples).

 

Trading Cryptocurrency

Traders are considered to be in business – the business of trading cryptocurrency.

For traders, trading stock concessions apply to cryptocurrency; it is recorded at the lower of cost or net realisable value (NRV). NRV for cryptocurrency can be measured as the market value from a reputable exchange.

The ability to record closing stock (coins held at year end) at the lower of cost (what it was purchased for), and NRV (market value), allows a trader to realise any unrealised losses at the end of the financial year.

For example, John, a trader, purchases Bitcoin in December 2017. He actively trades cryptocurrency. At 31 March 2018, he holds 1 Bitcoin, and his weighted average cost price is $18,000. However, the NRV (or market value) is $9,500. By recording the trading stock at the lower of cost or NRV, allows John to realise an $8,500 tax-deductible unrealised loss.

Like other businesses, traders are also allowed to claim a tax deduction for expenses incurred in carrying on a business. Tax-deductible expenses may include exchange fees, trading view subscriptions, educational or training costs, telegram groups, telephone or internet charges. It also may consist of expenses such as home office expenses (the portion of your home you use for a business activity) and mileage or motor vehicle expenditure to carry on a business (for example travel to a cryptocurrency event or meet-up).

 

Holding Cryptocurrency

For holders, cryptocurrency is recorded as property on revenue account.

This means that cryptocurrency is recorded at its cost price. A holder is not able to write down the closing value of the cryptocurrency to market value because they are not in business. As no business is carried on, only expenses directly related to earning income are tax-deductible (for example, exchange fees).

 

What is the Difference Between a Trader and a Holder?

There is no one size fits all approach that distinguishes traders from holders. Subsequently, it depends on the nature of the activity and the intention of the taxpayer.

The key factors to consider are:

  • Statements of the taxpayer about their intentions
  • Nature of the activity
  • The period over which the person engages in that activity
  • The scale of operations and the volume of transactions
  • The commitment of time, money and effort
  • The pattern of activity
  • The financial results

BitPrime also has an index of Cryptocurrency Regulation and Tax Reports in our Knowledge Base. This index includes links to information provided by the FMA, Inland Revenue, and the Reserve Bank of NZ.

To find out more about tax implications feel free to contact Evans Doyle Accountants (previously AgBiz Accountants). Based in the Waikato since early 2016, Time Doyle, Jane Evans, and the rest of the team work with clients New Zealand wide.


Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Last updated: 18/10/2018

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