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Home News News Like any trading cryptocurrency attracts tax, by Kayla Dean
News • 2021-08-12

Like any trading cryptocurrency attracts tax, by Kayla Dean

As with different currencies, there are differing cryptocurrency transactions and therefore different tax treatments. The two main types are trading i.e., buying and selling and the second type is building blockchain or block mining. Some of the others not discussed here are Airdrops and Hard Forks.

The first step to working out if your cryptocurrency transactions are taxable rests on the basic tax principals of the purchaser’s intention at the purchase date. Was it for resale or part of a revenue steam? Whether that resale be in three weeks or three years, if the intention was for resale, then time is not a factor.

With cryptocurrency trading no revenue stream is available, unlike interest earned on a bank term deposit. Therefore, the only intention would be for resale at a later date. You might consider it a long-term investment or a hedge against inflation, but the end result is always going to be resale, therefore this type of transaction is going to be taxable.

At what point in these transactions will tax be become liable?

When the profits are realised i.e. when the currency is sold, any profit made on that sale will be taxable.

                                  Sale price – purchase price = taxable profit.

As your currency increases or decreases in value, these rises and falls are not realised until a sale is made. Only once the sale is made is any profit or loss made taxable. On the reverse side, as you are in the business of trading currencies any losses made on sale can be offset against any profits made.

Block mining is different in that you are part of the process that creates the underlying block chains that store the information for cryptocurrency transactions. Once you start mining you are creating a sellable product which creates taxable revenue, similar to turnover in any retail business. Sometimes the miner can be paid by way of cryptocurrencies.  The income is recognised at the date of the sale, at the exchange rate on the day of the transaction.  When the cryptocurrency is later sold, the difference between the income already recognised and the amount received will also be taxable.

Something else to consider is your residency status. If a New Zealand tax resident, you are required to declare your worldwide income in your NZ tax return. So, if you are trading in foreign cryptocurrencies and using foreign bank accounts you will still need to declare this income in your tax return. If you are not a NZ tax resident, or if you are not sure what your tax residency is, we recommend you seek advice from a chartered accountant.

Cryptocurrencies are becoming increasingly common, so it is a timely reminder to review your investments and seek professional tax advice to ensure you are aware of any tax obligations.

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