Most of our professional and doctor clients who own cryptocurrency would not describe themselves as crypto investors or traders. In many cases they purchased some Bitcoin or Ethereum several years ago, made a few trades, and then largely forgot about it. The problem is that Inland Revenue hasn’t forgotten about it.

We are increasingly seeing situations where otherwise compliant professionals have cryptocurrency transactions that have never been considered from a tax perspective. In most cases, this is not because they are trying to avoid tax. Rather, they simply assume that tax only becomes relevant when they convert their cryptocurrency back into New Zealand dollars. Unfortunately, that assumption is often incorrect.

Why cryptocurrency catches people out

Many professionals who invest in cryptocurrency do not see themselves as traders.

A doctor may have purchased a small amount of Bitcoin during COVID, exchanged some of it for Ethereum a few years later, received a few staking rewards and then largely forgotten about it. From their perspective, they are simply holding an investment. However, from a tax perspective, several of those transactions may have created taxable events.

One of the most common surprises is that tax can apply even when no money is withdrawn from an exchange or transferred to a bank account.

Is cryptocurrency taxable in New Zealand?

Unlike some countries, New Zealand does not have a separate capital gains tax regime for cryptocurrency. Instead, the tax treatment depends on why the cryptoasset was acquired and how it has been used.

Inland Revenue’s long-standing view is that most cryptocurrencies are acquired with an intention of disposal. As a result, gains made on sale or exchange will often be taxable.

Each situation needs to be considered on its own facts, but investors should not assume that cryptocurrency gains are automatically tax-free.

Common crypto transactions that may have tax consequences

Examples of transactions that may trigger a tax event include:

• Selling cryptocurrency for New Zealand dollars.
• Exchanging one cryptocurrency for another.
• Using cryptocurrency to purchase goods or services.
• Lending cryptocurrency and earning rewards.
• Receiving staking rewards.
• Mining cryptocurrency.
• Selling or trading NFTs.

Many investors are surprised to learn that exchanging one cryptocurrency for another can have tax consequences.

Example

Charlotte buys Bitcoin for $10,000. Two years later, she exchanges that Bitcoin for Ethereum when the Bitcoin is worth $18,000. Charlotte has not received any cash and has not transferred any money to her bank account. However, she has disposed of one cryptoasset and acquired another. Depending on her circumstances, the transaction may have tax consequences.

This is one of the most common areas of misunderstanding we encounter.

Crypto losses and expenses

The tax rules do not only apply when profits are made.

Where cryptocurrency gains are taxable, losses may also be deductible in certain circumstances. Similarly, some costs associated with acquiring, holding or disposing of cryptoassets may be taken into account when calculating taxable gains or losses.

Potential deductions may include:

• The cost of acquiring cryptoassets.
• Exchange and transaction fees.
• Interest on money borrowed to acquire cryptoassets.
• Certain mining-related costs.

The availability of deductions will depend on the nature of the activity and the individual circumstances involved.

Record-keeping matters more than most people realise

One of the biggest challenges with cryptocurrency is record-keeping.

We often meet investors who have used multiple exchanges, changed wallets or traded sporadically over several years. By the time they want to determine their tax position, reconstructing the transaction history can be difficult and time-consuming.

Investors should retain records of:

• Cryptocurrencies bought, sold, or exchanged.
• Transaction dates.
• Wallet addresses.
• Exchange transaction histories.
• Bank statements relating to crypto transactions.
• The New Zealand dollar value of each transaction.
• Any fees or costs incurred.

These records should generally be retained for at least seven years.

If you hold cryptocurrency, it is worth regularly downloading and backing up your transaction history while it is still easily accessible.

Why this is becoming more important

Historically, some investors assumed that cryptocurrency activity sat outside Inland Revenue’s visibility. That assumption is becoming increasingly difficult to justify.

The New Zealand Government has implemented the Crypto-Asset Reporting Framework (CARF), an international information-sharing regime that will require participating crypto service providers to collect and report information about their customers and transactions.

Importantly, CARF does not introduce any new taxes. What it does do is increase the amount of information available to tax authorities.

This reflects a broader trend we have seen across the tax system. Inland Revenue continues to invest heavily in data matching and information-sharing capabilities, giving it access to more information than ever before.

A good time to review your position

If you own cryptocurrency, now is a good time to let your accountant know. We are not suggesting that every crypto investor has a tax problem. However, we are increasingly seeing situations where otherwise compliant professionals have bought, traded, staked, or exchanged cryptocurrency without realising there may be tax implications.

A short conversation today is usually far easier than trying to reconstruct several years of transactions later.

If you have invested in cryptocurrency and are unsure about your tax position, we can help you understand your obligations, identify any potential issues and ensure your reporting is accurate.