A New Zealand tax resident normally pays tax on their world-wide income. However, for new migrants arriving to New Zealand, there is a temporary tax exemption on foreign income. If you qualify, you do not pay tax on your foreign sourced income for the first four years.
Summary of the temporary foreign tax exemption:
- You must be a new migrant to NZ, or, have not been a NZ tax resident at any time in the 10 years before
- You are automatically entitled to the exemption and can only get the exemption once.
- You can choose to opt out of the transitional resident temporary tax exemption.
- You choose to opt out of the transitional resident status by applying for Working for Families (WFF); government assistance from Inland Revenue (IR) to make it easier to work and raise a family, or
- Opt-out by declaring overseas income in your NZ tax return.
- Opting out brings your entire foreign income into the NZ tax net (not just one type of foreign income).
Application to Cryptocurrency
The temporary foreign tax exemption applies to “overseas business income not related to the performance of services”. If you perform a service overseas to earn business income, you will not qualify for the foreign tax exemption.
When applied to cryptocurrency, we must therefore answer:
- What is business income relating to a service performed overseas? (taxable in NZ)
- What is oversea business income not related to the performance of a service? (therefore, non-taxable under the temporary foreign tax exemption)
At present there has been no guidelines published by IRD. This is only our current interpretation based on information available and we recommend you seek individual specific advice or contact us. The specific nature of where you purchase and sell cryptocurrency (in or out of NZ), and your specific cryptocurrency activity and tokens can have material tax consequences.
Buy and Hold Investment
If you buy and hold a cryptocurrency you are not in business and not performing a service. Therefore, the temporary foreign tax exemption applies.
For example, if you brought Bitcoin at $5k on 31 March 2019 (outside of NZ), moved to NZ on 1 April 2019 (provided you meet the temporary foreign tax exemption criteria), and then disposed Bitcoin on 31 March 2023 for $100k (within the four year period), the $95k gain would be tax free in NZ.
In this example, the gain is a classified as a ‘gain on sale of overseas property, held on revenue account’.
If you disposed the Bitcoin after the four-year temporary tax exemption, there is a strong argument that your cryptocurrency holdings enter the NZ tax net at market value on the day after the temporary foreign tax exemption ends.
For example, same details as the example above, except the sale date is one year later for $110k. In this situation the Bitcoin enters the NZ tax net at $100k value on 1 April 2023 (four years after arriving in NZ). This becomes the cost value. Then it is sold one year later for $110k. In this situation the $10k gain is taxable in NZ (as it is after the temporary foreign tax exemption), however the increase from $5k to $95k still qualifies for the temporary foreign tax exemption.
A trader is performing a service (the trading of cryptocurrency) and is in business. Even if the trades were occurring on overseas exchanges (performed overseas), the trader is still in business and therefore does not qualify for the temporary foreign tax exemption. Cryptocurrency trading is generally considered business income due to the nature of the activity and intention of the trader.
Cryptocurrency trading would bring your entire foreign income into the NZ tax net (not just your cryptocurrency trading income).
Proof of Stake and Proof of Work
POS and POW is a service. This is because the POS/POW is verifying transactions on the blockchain (providing the means for a consensus algorithm). This service is provided regardless of the physical nature (or lack of) required. The staking of the coin and voting are the services that you provide to the blockchain. Furthermore, Inland Revenue (IR) have stated that:
“A cryptocurrency miner is a person who validates cryptocurrency transactions and maintains the ledger. In exchange for this service, they receive cryptocurrency.” Source: https://www.classic.ird.govt.nz/income-tax-individual/cryptocurrency-qa.html
Our conclusion is therefore that POS is like POW (a service performed), albeit by a different measure. POS (by itself) would therefore not qualify for the temporary foreign tax exemption.
We have experienced some transitional residents who are outsourcing their proof of staking. They have engaged a provider who provides a service of ‘staking your coins’. They provide this service in exchange for a management fee.
This presents a strong argument that the transition resident is no longer provided the service (they are paying someone else to do the service) and therefore the income would qualify for the temporary foreign tax exemption. These type of situations needs to be addressed on a case by case basis.
There are other (non-tax) factors that also need to be considered such as losing control of any voting outcomes and the security of tokens.
Other Cryptocurrency Activities
If you are involved in earning rewards from cryptocurrency (interest or dividend like), or involved in lending of crypto backed loans, the specific activity of the activity needs to be considered. In some situations, these could be financial arrangements and taxed differently, and may or may not be services.
Specific individual advice is recommended.
- At the end of the four-year temporary tax exemption, the overall value of your cryptocurrency (at that point in time) enters the NZ tax net (strong argument for market value on that day). You would then be subject to NZ tax as an ordinary NZ tax resident; taxed on your worldwide income.
- Any cryptocurrency acquired in NZ after you arrive in NZ would automatically enter the NZ tax net (as it is NZ acquired property).
- Cryptocurrency acquired from foreign sources after arriving in NZ would remain outside the NZ tax net if it was held on revenue account (or used in an activity that continues to meet criteria of the temporary foreign tax exemption).
- Trading of foreign sourced cryptocurrency would result in your entire portfolio entering the NZ tax net.
Contact us for a no obligation phone call or meeting to discuss any questions about your cryptocurrency taxes
Phone 07 823 4980 or email Tim.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.