Volatility in price of Bitcoin raises tax questions
Bitcoin is back in the news. Whether it is high profile Twitter users helping drive up the market and then doing an about turn, or Wall Street heavyweights investing, Bitcoin has been making headlines (again).
The tax treatment of crypto assets first became a hot issue in 2016 when the price of Bitcoin rose from US$500 to US$1,200 and continued to climb strongly to almost US$20,000 by the end of 2017. But the price then dropped to a low of US$3,300 by the end of 2018. By the end of 2020, the price was on the up again, first breaking through US$20,000 and then rising to over US$60,000 by April, only to dramatically fall below US$25,000.
The renewed interest in crypto coupled with the large swings in prices has increased the number of tax questions. So here are a few we have been asked in the last couple of months.
Are there special rules dealing with the tax treatment of crypto?
No. Existing tax rules apply to transactions involving crypto assets in the same way that they apply to other transactions. Leaving aside GST for now, New Zealand’s income tax system already has the framework to deal with crypto. The issue is working out which set of rules applies.
In simple terms, crypto assets are rights embedded in the “blockchain”, i.e. a distributed ledger technology. The rights can take several different forms - for example, the ownership of a block (or fraction of a block) on the ledger may give the owner the right to sell or transfer the block to someone else. The value of the block is what someone else will pay for it. For this kind of asset, tax rules treat it as personal property and the rules that apply to personal property can be used, such as if the block was acquired for the dominant purpose of disposal, any disposal proceeds (whether fiat currency or a different kind of crypto asset) will be taxable.
There are thousands of different types of crypto assets, each with their own particular features and properties. For example, some can be used to evidence contracts, some can be exchanged for goods or services, some have properties similar to shares or bonds, and some represent or are backed by other assets such as gold or fiat currencies. In order to determine the tax treatment, it is necessary to analyse the rights and classify the crypto asset as (for example) a financial arrangement or an excepted financial arrangement. Once classified, the tax rules may then tax unrealised gains or only tax realised gains, with a deduction for costs.
In some cases, crypto assets may be personal property that is held on capital account, such that gains on disposal are not taxable. However, this depends on the holder’s reasons for acquisition and their other activities, rather than being a feature of a particular crypto asset, i.e. one person may have a non-taxable capital gain on disposal but another would be taxable.
Has Inland Revenue provided any guidance on how crypto should be taxed?
Inland Revenue has released various guidance on the tax treatment of crypto assets. We commented on the guidance released on the website in our November 2020 Tax Alert.
There is also some more detailed public rulings covering providing crypto assets to employees – such as in the statement “Providing cryptoassets to employees”. Inland Revenue is also currently consulting on the more technical issues around hard forks and airdrops, which we covered in our February 2021 Tax Alert.
Why does Inland Revenue think crypto is like gold?
There are a number of similarities between gold and Bitcoin. For example, both are mined and neither generate income.
Inland Revenue published “Are proceeds from the sale of gold bullion income?” in September 2017, and reference this in relation to crypto assets. As noted in the summary, “some of the issues discussed are particularly relevant to the disposal of non-income producing assets.”
The guidance states: “In the case of gold bullion, the Commissioner considers that [consideration of the nature of the asset] is particularly [important], as bullion does not provide annual returns or income while it is held, nor does it confer other benefits (which other investments that do not provide income while held might). The Commissioner therefore considers that, for gold bullion, the nature of the asset is a factor that strongly indicates that it was acquired for the dominant purpose of ultimately disposing of it.”
In other words, Inland Revenue expects that in most cases, the proceeds from the disposal of gold bullion will be taxable.
Given the similarities that can be drawn between gold and Bitcoin, it is not surprising that Inland Revenue liken Bitcoin to gold, and therefore expect that in almost all cases, disposal of Bitcoin gives rise to taxable income.
I’ve lost half my investment, so can I get a tax deduction for my loss?
Given the recent fall in value of Bitcoin, and that Inland Revenue want to tax gains, what happens for losses? That depends on when you acquired the Bitcoin.
For example, if you acquired some Bitcoin for $1,000 and value increased to $80,000 but is now worth $30,000, if you sell the Bitcoin the gain of $29,000 is taxable. You may think you have lost $50,000, but as tax only applies at disposal, and you were not taxed on the growth from $1,000 to $80,000, you are only entitled to a deduction for the original cost. However, if you bought the Bitcoin for $80,000 and sold for $30,000, then the loss of $50,000 is likely to be deductible.
Can I pay my staff with crypto so they aren’t taxed?
As mentioned above, Inland Revenue has released a number of public rulings dealing with providing crypto assets to staff. In most cases, for example if staff agree to be paid in crypto, PAYE needs to be deducted.
However, where crypto assets are issued by the employer and provided to the staff, PAYE should not apply. This doesn’t mean that the arrangement is tax free - it just shifts the tax obligation to the employer under the FBT rules.
My crypto token forked and I received airdrops. I haven’t got any income, have I?
Inland Revenue issued an issues paper on this issue last year, which we covered in our February 2021 Tax Alert. Inland Revenue are now consulting on this, with the following guidance - “Income tax – tax treatment of crypto assets received from a hard fork” and “Income tax – tax treatment of crypto assets received from an airdrop”.
In short, whether a hard fork or airdrop is taxable will depend on whether the person carries on a crypto asset business. However, even if the hard fork or airdrop is not taxable, the proceeds from disposal of the crypto assets received from the hard fork or airdrop will, in most cases, be taxable.
Crypto currency is just another currency, so exempt from GST?
Currently crypto currency does not generally fall under the definition of money for GST purposes, meaning that supplies of crypto currency made in the course of carrying on a taxable activity can potentially be subject to GST. This can cause a number of issues. We understand that changes to the GST legislation will be introduced in the next tax bill in a couple of months to clarify a number of issues, so expect more on these shortly.