How is cryptocurrency taxed?
Good question. It seems that the jury is still out on whether cryptocurrencies are a good thing or a bad thing from an investment perspective. However, love it or hate it, the existence of cryptocurrency is now an established concept and it is increasingly posing questions in the New Zealand taxation space.
Not only is it important to consider the New Zealand taxation position from an investment perspective but cryptocurrencies are now increasingly starting to feature in business operations and remuneration strategies, particularly in the tech space. Furthermore, revenue authorities around the world are starting to formulate their view on the taxation of cryptocurrency. New Zealand Inland Revenue has already published its thoughts on the taxation of cryptocurrency and has issued a discussion document on the treatment of cryptocurrency as a remuneration item. It is important therefore to understand the potential taxation implications when considering cryptocurrency as part of your strategy.
What are the specific cryptocurrency tax rules?
There is currently no specific taxation legislation in New Zealand that deals with cryptocurrency. Until we have such legislation, we have to rely on the broader application of existing legislation.
Is cryptocurrency cash for tax purposes?
Cryptocurrency is not legal tender in the truest sense as it is not fiat currency issued by any particular government.
The New Zealand IRD’s published view is that cryptocurrency is not cash for taxation purposes.
If cryptocurrency is not cash then New Zealand’s complex rules around the taxation of foreign exchange movements under the Financial Arrangement regime cannot apply. As a result, logic says that there cannot be any deemed taxable income arising from unrealised gains or any tax relief for unrealised losses derived from the ownership of cryptocurrency.
The IRD’s stated view is that cryptocurrency is property for tax purposes.
Taxation of property largely depends on the purpose for which it is used or acquired.
What is the tax treatment of cryptocurrency in business?
Cryptocurrency it is clearly a tradeable commodity and may be accepted as a form of payment, with nothing to prevent its use under New Zealand legislation. Additionally, cryptocurrency can also be mined. So, however, you look at cryptocurrency, it does potentially have a business value, although that value can shift from time to time, sometimes dramatically so.
If a business receives a cryptocurrency payment in exchange for the provision of goods or services, then that business is receiving a value amount in exchange for those goods or services. The business is therefore receiving trade income under ordinary concepts. The taxation of trade income is well documented in basic New Zealand income tax legislation, both in the form of ordinary cash based payments and in the sense of barter arrangements.
Whilst unrealised cryptocurrency gains or losses are not recognised from the mere ownership of cryptocurrency, if the cryptocurrency is received as a payment of business or trade income and is not immediately converted into NZD then the business will still be required to establish an equivalent NZD value of the cryptocurrency for income purposes.
Similarly, if an individual or entity is in the business of mining for cryptocurrency then surely the intention of that business is to generate income or profit from those activities. Much like a business involved in the mining of tangible minerals or other natural commodities, any profit derived is taxable income under ordinary concepts. Any profit will therefore need to be recognised for New Zealand taxation purposes by reference to a conversion into NZD at the relevant time.
Tax on cryptocurrency as an investment
The question to ask here is whether cryptocurrency is considered to be capital in nature or a revenue source? In many countries this is perhaps less of an issue as any resulting increase in value will either be captured by income tax rules or by capital tax rules.
The absence of a headline capital gains tax regime in New Zealand makes this a far more relevant taxation question, particularly as we have already established that the Financial Arrangement regime cannot apply.
It is perhaps no surprise therefore that the New Zealand IRD is quick to point out that the tax treatment will depend on your intentions at the point of acquisition but that, as currencies like Bitcoin don’t generate income other than when they are sold, they can typically only have been purchased for the purposes of resale. Any profit on sale is therefore considered to be revenue, and therefore taxable. New Zealand IRD helpfully points towards its paper on the taxation of gold bullion as a guide, which also largely concludes that any profit from gold transactions is taxable income.
However, cryptocurrency has evolved since Bitcoin and some cryptocurrencies can now generate other associated spin-off benefits such as credit tokens. It may be the case that different types of cryptocurrencies can perhaps therefore be capable of being held longer term as an income generating capital asset. Any resulting gain on sale might therefore be argued to be free of tax as a capital gain on sale.
The only thing clear from this is that the concept of cryptocurrency as an investment continues to evolve as the currencies themselves evolve, and therefore logically so must the taxation treatment.
Is cryptocurrency taxable as remuneration?
The use of cryptocurrency is being considered by some employers, both as a means of a regular remuneration payment and as a long-term incentive. To the extent that cryptocurrency is used either as a payment for day-to-day working activities or as a performance incentive it feels logical that a tax obligation arises. This is on the basis that the delivery of cryptocurrency has a direct link to the employment activity.
More relevant therefore is the question of how taxation is applied and, in the case of incentives, when taxation is applied.
New Zealand IRD has proactively issued a discussion document in the form of an Issues Paper setting out the potential tax landscape around these remuneration issues. In very simple terms, the Paper concludes that any payment in cryptocurrency is effectively subject to PAYE withholding, and is not subject to the FBT provisions – this despite the fact that Inland Revenue states elsewhere in its general guidance that cryptocurrency is property, not cash.
It feels like this PAYE view is a little too conveniently arrived at by a reliance on the fact that either the cryptocurrency is effectively delivered by converting part of the existing contractual cash remuneration or by implementing a salary sacrifice arrangement to deliver what would, in the IRD’s eyes, otherwise have been a cash entitlement. This latter point in particular seems to rely on what appears to the IRD’s fundamental mistrust of salary sacrifice arrangements.
The position overlooks the fact that as a general concept salary sacrifice can, if implemented correctly, legitimately deliver non-cash remuneration that falls under the FBT regime. Furthermore, such fringe benefits can potentially be tax exempt in certain circumstances. It’s worth noting at this point that, in comparison, the ATO has concluded that remuneration in cryptocurrency more likely falls into the Australian equivalent FBT regime.
New Zealand IRD further justifies its position that PAYE is the correct answer by noting that other non-cash items such as accommodation and equity awards also fall within the PAYE regime, even though they too are not delivered as cash. However, unlike cryptocurrency, these items are specifically addressed within New Zealand taxation legislation to ensure that they sit squarely within the PAYE regime (even if it’s only in a reporting sense when it comes to equity awards).
The key concern with Inland Revenue’s initial view that PAYE is the answer is that it effectively imposes a withholding tax obligation on an item that is not in a cash form. This means that the employee either has to lose more net cash pay to meet the tax costs of the cryptocurrency component or the employer has to gross up the tax cost of the cryptocurrency.
“Hard luck!” you might say, but the relevant point here is that this also overlooks the associated extra cost and complexity that employers will face in having to deal with the additional implications coming from a PAYE approach.
For example, further consideration needs to be given to KiwiSaver Act obligations, student loan repayments, Holidays Act obligations and similar requirements that will invariably arise on the cryptocurrency component. For this reason alone, the related taxation obligations arising on cryptocurrency as a remuneration component are more easily managed under the FBT regime without any material loss of tax revenue.
The Issues Paper also glosses over the concept of cryptocurrency as a long-term incentive, which is potentially a more likely use for cryptocurrency as a remuneration tool. To be fair, the taxation rules around equity based incentives probably act as a reasonable guide in this space, in the sense that a well constructed cryptocurrency based long-term incentive scheme will probably share many of the attributes of a similarly well constructed equity based long term incentive scheme.
The key point here is therefore that any employer considering using cryptocurrency as a long terms incentive should put as much care and effort into the construction of their incentive scheme as they would (or should) put into an equity based equivalent. The lack of any existing New Zealand taxation legislation, case law or detailed commentary around cryptocurrency should not be an excuse to overlook the New Zealand taxation implications for both the employer and the employee.
Whether cryptocurrency is here to stay or whether we will look back on its demise with a fondness currently reserved for Betamax remains to be seen. Regardless of the outcome, it would be unwise to ignore the potential New Zealand taxation implications of cryptocurrency – the New Zealand Inland Revenue are clearly not intending to ignore these implications!
If you need help with your cross-border employment or personal tax obligations contact TaxBridge Limited for further information.
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This publication contains generic information only and TaxBridge Limited is not providing any specific advice. TaxBridge Limited is not responsible for any loss sustained by anyone relying on the contents of this publication. TaxBridge Limited recommends that specific taxation advice is sought for all matters covered by this publication.