By Susan Edmunds, Money Correspondent, RNZ and is republished with permission
Inland Revenue (IR) has sent its first batch of letters to people who would normally have their tax assessed automatically, and who Inland Revenue are aware have traded crypto assets.
The tax department said it had identified 355,000 crypto-asset users in New Zealand who had undertaken 57 million transactions worth a combined $36 billion.
Crypto-assets are treated as a form of property for tax purposes and what people make from selling, trading or exchanging crypto-assets is taxable. Any profit made is treated as income, added to other annual earnings, and taxed within a person’s regular income tax bracket.
Inland Revenue said if people were making money from crypto assets they should be thinking about their tax obligations on this income and the risks of not declaring all related taxable activities.
Access to increased data has allowed IR to identify people with significant crypto assets and New Zealand is now implementing the Crypto-Asset Reporting Framework (CARF), which took effect on 1 April.
Through CARF and annual exchanges of information with other tax authorities, IR will also receive information on transactions and transfers of crypto-assets that take place overseas by New Zealand tax residents.
Inland Revenue will be matching the information to tax returns and following up on any discrepancies.
It said its letter was the opportunity for people who received income from disposing of crypto-assets to review their tax position and correct any errors by filing an Individual income tax return – IR3.
Deloitte partner Ian Fay said the department was clearly emphasising that people could not assume that their crypto activity was invisible.
“For a lot of people, if you’ve got investments in crypto, even if it’s a relatively modest amounts, if you’re starting to double your money or more in terms of taxable income, and you haven’t got other funds aside to pay that tax, it’s still going to be difficult if you’ve not understood the rules properly and not returned the right amount of income to discover you’ve got a tax bill, plus interest, penalties for not accounting for it properly at the time.
“And more so if you’ve got all of your spare money tied up in crypto, and the crypto market has gone down, it gets hard if you’ve made some income a year or so ago that you didn’t properly return to Inland Revenue, your remaining crypto has now gone down in value, you may not have enough left to sell to pay the tax bill that you’ve got from a couple of years ago.”
He said people would not need to have cashed up their investments to get a tax bill.
“Some crypto investments will generate income, which is taxable.
“But more commonly, as soon as you go from one crypto asset to another crypto asset, in a lot of cases, that act will be treated as a taxable disposal of the first asset. And you’re acquiring a second asset.
“For example, often Bitcoin is the gateway crypto asset into other crypto investments. So you might buy some Bitcoin. And then a little while later, you might sell or exchange that Bitcoin for another crypto investment.
“You still think your investment is within the sort of crypto ecosystem, but that act of exchanging the Bitcoin for something else is a taxable event. If your Bitcoin went up in value, then you pay tax on the gain.”
He said many people still did not understand the rules or had not worked out their liabilities correctly.
“People won’t necessarily have huge amounts invested. But you could still do a lot of transacting and create a lot of tax compliance if you weren’t keeping on top of it.”
University of Auckland senior finance lecturer Gertjan Verdickt said a Norwegian study showed 88 percent of crypto holders had not declared their holdings in their tax return.
“Strikingly, even among investors trading on regulated domestic exchanges that already share data with the tax authority, 80 percent still didn’t declare.
“But the bigger picture: most non-compliers owed fairly modest amounts individually – bounds of around US$200 to US$1,000 per person, so the story is more about breadth than big tax evasion, and Norway is a good proxy for NZ given both treat crypto as property and have similar adoption rates. Also, it suggests that going after this money from an IR perspective can be costly.”
