For all the talk of the brave new world of deregulated and decentralised crypto finance, one very old world fact remains: if you’re buying and selling crypto, Mr Taxman will want his slice of any profits. Canstar explores all you need to know about the crypto tax implications of buying and selling cryptocurrencies in NZ.
Crypto tax: Who has to pay?
The simple answer to the above question is: pretty much everybody who buys and sells cypto. The Inland Revenue Department (IRD) breaks it down into three groups:
- People buying crypto with the intention to sell it
- Those buying crypto for a profit-making scheme
- Crypto traders
Crypto tax: Simple buying and selling crypto
Unless you’re buying crypto to actually use it as a currency and buy something (and, really, who does that, apart from people who need to pay some hacker’s ransom, or criminals on the dark web?), you must pay tax on any profits you make selling crypto.
Tax laws are not simple, but they are strict. If at the time of purchasing your crypto you have the intention of selling it at some point in the future, you need to include any profits you make at that point on your tax return.
So beware, it’s up to you to prove you never purchased the crypto as a speculative investment. As the IRD stipulates: “If you sell or exchange your cryptoassets for a profit and claim that you did not acquire them for the purpose of selling or exchanging them, you will need clear and compelling evidence to support your claim.”
Crypto tax: Profit-making schemes like staking
If you’re using your crypto for a profit-making scheme, for example staking, your tax obligations increase. What is staking, I hear you ask? Let me explain:
One of the major criticisms of Bitcoin is that it uses proof of work to validate transactions. Proof of work uses huge amounts of electricity to solve complex mathematical problems that are at the heart of the validation process.
Proof of stake (PoS) is a greener alternative for validating blockchain transactions, it’s used by coins including Cardano and Solana. Ethereum is in the process of moving to PoS.
PoS awards validation rights on a lottery like basis. To be in the draw, a validator has to put up, or stake, its own cryptocurrency. For example, Ethereum says users will need to stake 32 ETH to become a validator. At ETH’s current price (as of 23/02/2022), that’s roughly a $125,000 stake.
PoS incentivises validators to do a good job, as they risk losing part, or all, of their stake for failing to perform a smooth validation or trying to cheat the system.
If you hold cryptocurrency, you can agree to lend (stake) your crypto to a validator, in return for a cut of the profits, plus your original stake back. It’s rather like putting your money in a term deposit: the bank lends out your money and gives you a cut of the profit it makes.
However, as staking is a profit-making scheme, you need to pay tax on any money you make staking, as well as any profit you make from selling your crypto stake further down the line. Two separate profits, two separate tax obligations.
Crypto tax: Crypto trading
Of course, if you’re buying and selling crypto on a full-time basis, you’re going to be liable for tax, too. According to the IRD, the difference between a casual crypto purchaser and a professional trader involves:
- A high number of transactions
- Spending a lot of time and effort managing a cryptoasset portfolio
- Working on a cryptoasset portfolio on a fairly continuous basis
However, if you are running a crypto business, and not just dabbling in crypto, different tax rules apply. The amount of money you receive from selling or exchanging crypto is classed as business income. This means you’re able to deduct the costs (and losses) associated with your crypto trading as business expenditure – so you’ll definitely need to talk to a tax expert about your obligations.
Crypto tax: How much tax to pay?
While working out if you have to pay tax on your cryptoassets is easy: probably yes! Working out how much tax you must pay is more difficult.
If you regularly buy and sell crypto, you’ll make profits and losses at different times, on different amounts and using different cryptocurrencies.
You might make money one month on Bitcoin, only to lose your profits the next buying Binance. And given the volatility of crypto markets, you might not make a profit at all.
Even the IRD admits that: “it can be difficult to determine the cost of your cryptoassets at the time you sell them”. To work out your crypto tax obligations, the IRD suggests that you can use either of these methods to work out a value:
First-in first-out (FIFO)
This valuation method presumes that the order in which you sold your crypto followed the same order as you bought it. First bought, first sold.
Weighted average cost (WAC)
This valuation method attributes an average cost and sale price to your crypto transactions.
Either way, if you are dabbling in cryptocurrencies, it’s advisable to talk to a tax professional. Tax laws are complex, and penalties are stiff for those who try to rort the system. And remember, by the very nature of crypto, every trade and transaction you make, is indelibly recorded in the blockchain for all, including the IRD, to see.
About the author of this page
This report was written by Canstar’s Editor, Bruce Pitchers. Bruce began his career writing about pop culture, and spent a decade in sports journalism. More recently, he’s applied his editing and writing skills to the world of finance and property. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.
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