Anyone who traded cryptocurrency in New Zealand before March should now be weighing up whether they would be wise to voluntarily disclose any gains to Inland Revenue, after the regulator made its first move towards taxing cryptocurrency investors last week, writes Campbell Pentney, special counsel at Newsroom foundation sponsor Bell Gully
A ‘carrot and stick’ approach to New Zealand’s tax legislation means those who voluntarily disclose gains from trading in cryptocurrencies could avoid stiff penalties – up to 150 percent on the tax owed – as Inland Revenue eyes a tax take that could potentially be worth millions.
With the market performance of crypto assets leading all other asset classes this year, it was perhaps inevitable that Inland Revenue would start to take an interest in this sector. That interest has now manifested in a request for customer information from at least one local cryptocurrency dealer, Easy Crypto.
In this, Inland Revenue is following in the footsteps of other tax offices including the Australian Tax Office. It’s likely the next step will be for local investors to receive a letter in the coming months reminding them to comply with their tax obligations and to come clean on any undisclosed gains, as happened in Australia.
The information requested locally includes customer transactions and their blockchain wallet addresses. This might be sufficient for Inland Revenue to ‘follow the money’ and locate other holdings or reveal other exchanges that the customer uses, even if those exchanges are based overseas.
For example, many Easy Crypto investors would likely purchase bitcoin which is then deposited into a larger exchange based overseas such as Binance or Coinbase. Inland Revenue will also compare the profile of crypto investors against the position taken in their tax returns. So far the request only looks at transactions until 31 March 2020, but requests for future years are likely.
Investors should be considering their next move seriously. The risks of not disclosing taxable income can be fairly severe, with penalties for evasion at as much as 150 percent and use of money interest running at around 8 percent per annum. However, there is a voluntary disclosure regime, whereby an upfront disclosure can reduce penalties – by up to 100 percent in some cases. Even if Inland Revenue has given notice of an impending audit, there is still an opportunity for an upfront disclosure and a possible 40 percent penalty reduction.
It won’t be a simple process, because the tax implications of cryptocurrency are complicated and not widely understood. Most importantly, tax can be triggered by trading activities – even if there is no withdrawal into cash.
Even using bitcoin to buy coffee is technically a trade with a tax effect. Nor does the absence of a capital gains tax assist crypto investors, as Inland Revenue looks to a specific rule that applies when an asset is purchased with the intention to resell. Inland Revenue’s view appears to be that, like gold, most crypto assets are acquired with that intention.
In recent years, tax collectors have struggled to elicit compliance from cryptocurrency investors, partly due to the difficulty of matching cryptocurrency to named taxpayers, and partly due to a lack of understanding by taxpayers as to when tax was payable. Now those tax collectors are turning to local exchanges which are obliged to hold personal details – and those details can be used to match names to crypto wallets.
In this case, Inland Revenue’s best outcome would be a flurry of amended tax returns or disclosures, with increased compliance in the next tax year. To achieve this, it might be in Inland Revenue’s interests to adopt a fairly benevolent approach to those who come forward so as to encourage others to comply.
Cryptocurrency investors may find some unfairness with this position – most notably due to the difficulty of calculating an accurate tax position and the lack of guidance in this area (which is updated from time to time, but at a relatively slow pace). They might also see that the crypto tax position is inconsistent with that of many share or property investors, who are often able to sell with no tax applied to their profits. On the other hand, investors who have simply accumulated cryptocurrency without any selling or trading are unlikely to need to file tax returns until they sell.
There may be a silver lining for some. Investors who have lost money trading cryptocurrency are usually entitled to a tax deduction for those losses, which in some cases could result in a refund of cash.
In some cases this applies to stolen or lost cryptocurrency, including where an exchange is hacked (such as the New Zealand exchange Cryptopia) – but with tax payable if funds are recovered. However, any investor claiming to have lost their private keys or wallets will likely encounter some scrutiny and may have to prove that the coins have not moved since.