29 Sep Crypto Cryptics

Sometimes it can feel like Crypto Cryptics when you read about Crypto currencies online and hear stores from people. Here’s everything we currently know about crypto currencies and how they can affect your end of year financials.

Around 800,000 Kiwi’s own some form of ever-changing crypto currency, so there’s no surprise there has been a lot of information floating around about them.  Unlike gains on the sale of shares and other investments, crytoasset sales are subject to income tax and need to be included in your end of year financials and tax returns. Even exchanges between  different tokens are taxable transactions, so profits on those exchanges must be calculated. This applies even if you just dabble in the crypto game.

The IRD have released some guidance material to help the un-wary since there aren’t currently any tax provisions targeting Cryptoassets:

IRD – Cryptoassets
IRD – GST Policy Issues (Page 9 and onwards)
Tax Treatment of Cryptoassets Received from Airdrop
Tax Treatment of Cryptoassets Received from Hard Fork

Different Types of Cryptoassets

There are so many different types, but here are the ones in vogue at the moment:

Cryto Currency – the most common and probably what comes to mind when people think of ‘Cryptoassets’. Think Bitcoin and other crypto coins.

Non-Fungible Tokens (NFTs) – this is an individual cryptoasset and is a one of a kind. Some examples are digital artwork. It’s hard to believe, but this one sold for USD $69 million!

Yield Farming – this is where you can use your cryptoassets to gain more capital, but passively. With yield farming, you can lend your assets (temporarily) to DeFi plaformas for a while and earn interest. It’s like peer to peer lending. You’re lending your funds to others, and earning interest from them. The more you lend, the more interest you’ll make. 

So what type of trader are you? Do you dabble? Are you a Pro-Trader? Are you just holding on to your cryptoassets to see where it takes you? Whichever you are, you need to know what how it affects your tax.

Crypto is classed as ‘personal property’. You can liken it to the purchase of gold purchased for the sole purpose of generating future gains when you sell it. More often that not, crypto offers no returns on investment while you’re just holding on to it (staking is the exception to this rule), but as a general guide, the intent on purchase of any crypto is for future gain.

Tax is only calculated on the realised gain or loss when there is a sale of cryptoasset, but it gets tricky… you’re also taxed on any interest income you receive from crypto, and this is most likely to be in the form of coins. Many people think that there’s only a gain or loss when you actually sell crypto and no longer hold that asset. Not so…

Sales and Disposals

The IRD has said that the sale of crypto is a taxable event. Said sale triggers the requirement to work out the profit (or loss) made on that sale of that asset. This includes:

• The actual sale of the crypto
• A transfer between different type of currencies (Bitcoin, Ethereum, Tether etc)
• The exchange of one type of cryptoasset for another
• Giving someone else your asset – even if they’re related, friend etc

The transfer between wallets of the same type of crypto is not a disposal, and therefore not a taxable event.

Be careful now…

Some platforms use different terms to describe the same thing. Some wallets refer to a sale as a transfer, and not an actual sale, so do some research. Another thing to watch out for is the currency you have for different wallets will need to be translated in to NZD from say EURO or USD. Regardless of what your balance is at the end of the year in your wallets, we need to know every transaction made so that we can determine the profit and loss of those transactions.

So, what do we need from you before we do your end of year accounting?

Background:

1. What cryptoassets do you own?
2. What was your reason for buying the asset?
3. What are your plans with the cryptoassets you own?

Crunching numbers:

1. The number and cost of coins held at the beginning of the tax year.
2. The years transaction history clearly showing all sales, transfer etc with dates and values
3. The years transaction history clearly showing all purchases with dates and values
4. Did you pay any fees?
5. Did you do any transfers between wallets/platforms?
6. What did you eat for breakfast? Kidding! But sometimes we’re looking for new ideas.

Every cloud and all that…

There are a couple of benefits to having cryptoassets that make all of this hard work worth while

• Sales and disposals of cryptoassets are not part of the GST regime… yet
• The assets aren’t considered to be a ‘Financial Arrangement’ under our current tax laws. The other side to that coin is that the assets aren’t currently regulated by the NZ Financial Markets authority
• If you make a loss on the sale of any cryptoassets, it’s tax deductible. Yahoo!

Our ‘Crypto Cryptics’ not enough?

The better you understand your business and your financials, the easier it will be to make more money and ultimately achieve your goals.   We have developed comprehensive resources to enable business owners to fully understand and interpret their numbers.  Need more help? Join our free webinars on financial awareness coaching or talk to us about personalised financial awareness coaching.  Contact Samantha for a call, zoom or meet on 06 871 0793.

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