In common with several other jurisdictions, New Zealand’s tax authority has recently issued guidance to clarify the tax consequences of using cryptocurrencies such as Bitcoin.
Definition Of Cryptocurrency
The IRD says that cryptocurrency is "money" that only exists digitally or virtually. Typically, cryptocurrency uses cryptography and blockchain technology to regulate its generation and verify fund transfers. Cryptocurrencies can be transferred between people without using an intermediary and can be bought peer to peer, through online exchanges or by participating in Initial Coin Offerings.
For income tax purposes, virtual currencies are treated as property, rather than a form of currency. This means foreign currency gain or loss provisions do not apply.
However, cryptocurrency received as payment for goods or services is business income, which is taxable. Receiving virtual currencies in exchange for goods and services is treated as a barter transaction. As such, taxpayers must calculate the value of virtual currency in New Zealand dollars at the time it was received. Conversion rates used must be from a "reputable exchange with a reasonable trading volume".
In cases of "alt coins" – cryptocurrencies other than Bitcoin – it may be necessary to convert into US dollars, or any other fiat currency, and then convert into NZD.
The capital gains tax consequences of acquiring cryptocurrencies depend on the purpose of the acquisition. In cases where cryptocurrency has been purchased with the intention of selling or exchanging them later for again, such gains are taxable. This includes when one cryptocurrency is exchanged for another, or when a cryptocurrency is converted into New Zealand dollars or another fiat currency.
According to the IRD, Bitcoin and similar payment methods generally don’t produce an income stream or provide any benefits, except when they’re sold or exchanged. The department says,
"This strongly suggests that cryptocurrencies are generally acquired with the purpose to sell or exchange them"
The guidance states that taxpayers must keep sufficient records for tax purposes. As such, the standard seven-year record-keeping requirement applies to cryptocurrency transactions with tax consequences.
The guidance points out that those using mobile or desktop cryptocurrency wallets and exchanges should have access to their transaction history and be able to export this in a commonly used file format such as a CSV file. Bank statements and cryptocurrency wallet addresses should be kept for verification purposes.
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The IRD considers the mining of cryptocurrencies a profit-making activity and therefore proceeds are treated as taxable income. In situations where taxpayers are mining cryptocurrencies as part of a pool, mining income is derived when the pool distributes each miner’s share.
The IRD defines a cryptocurrency miner as a person who validates cryptocurrency transactions and maintains the ledger, otherwise known as the blockchain, which is a shared database of cryptocurrency transactions and is held by all users. In exchange for this service, they generally receive cryptocurrency.
While jurisdictions have taken different approaches to the taxation of cryptocurrencies, more and more tax authorities are paying attention to this area of tax compliance.
The IRD’s guidance has clarified the taxation of cryptocurrencies in various areas. However, it has yet to release comprehensive guidance on the goods and services tax issues related to virtual currencies. The IRD is expected to rectify this as part of a broader review of the GST regime.