The purpose of this article is to highlight cryptocurrency Goods and Services Tax (GST) risks and uncertainties. Specifically, how New Zealand taxpayers involved in cryptocurrency are disadvantaged due to existing GST legislation.
We have requested further information and clarification from Inland Revenue Department (IRD) about their GST position on cryptocurrency. At this point in time, answers remain vague and no conclusions can be drawn.
We have heard (unofficially) that some GST legislation changes may be in progress and we will continue to provide updates.
Until IRD clarify their GST position, cryptocurrency taxpayers in business, have potential GST exposure. We have outlined some pragmatic considerations further below.
Current interpretation of GST Act
- Cryptocurrency is not money for the purposes of the GST Act (it is not legal tender).
- Therefore, it must
be a good or service:
- Goods “do not include… money or a product that is transmitted by means of a wire… or other electromagnetic system or by means of a similar technical system”
- Services are anything which is not goods or money
Cryptocurrency is a product that is transmitted by electromagnetic system and as such may be deemed to be a service for GST purposes. This is similar to software which is transmitted electronically and is deemed to be a service for GST purposes.
What this means for taxpayers with a taxable activity involving cryptocurrency
A taxable activity includes an activity carried on in the form of a business. It must be continuously or regularly. Likely taxable activities involving cryptocurrency are: cryptocurrency retailer (selling cryptocurrency for $NZD), cryptocurrency trading, and NZ businesses providing goods or services (accepting cryptocurrency as payment).
GST registration is compulsory if business turnover is more than $60k pa. It is the taxpayers’ responsibly to collect 15% GST on sales and to pay the GST to IRD.
A taxpayer is not allowed a GST input claim for cryptocurrency purchased, unless they have a GST invoice. There is no second-hand goods GST claim on purchasing cryptocurrency.
Jake is in the business of cryptocurrency trading; he buys and sells cryptocurrency. Jake decides to sell $115,000 of cryptocurrency for NZ dollars to a NZ based purchaser. Applying the GST interpretation outlined above, the sale is technically subject to 15% GST, resulting in $15,000 of GST to pay.
Note: if Jake was to sell cryptocurrency outside of NZ, the sale would be GST zero-rated.
Double GST taxation (for businesses accepting cryptocurrency as a form of payment)
The current GST interpretation creates potential for double taxation when a business receives cryptocurrency in exchange for the sale of goods.
Bobs Cars receives $69,000 worth on Bitcoin for the sale of a vehicle. The supply of the good (vehicle) triggers a GST liability being 15% or $9,000. Bobs Cars pays the GST to the IRD on the sale of the vehicle. Note: the GST would need to be paid in cash to IRD, even though Bob received Bitcoin on the sale.
Three months later, Bobs Cars decides to sell the $69,000 Bitcoin to a NZ purchaser. Bob must pay another 15% GST on the sale of the Bitcoin as it is considered a service for GST purposes. He is not allowed a deduction for the original acquisition of the $69,000 of Bitcoin without a GST invoice.
Bob therefore pays 15% GST twice; 1: on the sale of the car at the time of the sale, 2: on the sale of the Bitcoin, sometime in the future.
- IRD did not mention GST in their original tax guidelines published in March 2018.
- The Australian Tax Office (ATO) has made some cryptocurrencies GST exempt in Australia (intrinsic value tokens such as Bitcoin, Monero, Bitcoin Cash etc). While this still leaves utility tokens, assets tokens and security tokens potentially in the GST regime, it is a starting point and we recommend that IRD follows ATO lead.
- We have asked IRD for guidelines and an opinion on GST several times. They understand the difficulties in advising taxpayers of their current obligations.
Discussion with IRD from March 2018 indicated:
- They were exploring an option that would make crypto GST exempt. This would likely require a change to the GST Act which results in a lengthy process to change existing legislation. We are not aware of any further updates confirming this. IRD have had significant projects implemented since March 2018 involving their internal resources; the tax working group project and significant IT upgrades.
- It is unclear if any proposed GST legislation changes for cryptocurrency would be back dated.
- income tax compliance and declaring cryptocurrency profits in income tax returns was a much higher priority for IRD than GST compliance
- We floated the situation of “doing nothing” in the short term and they had no comment on this. While we cannot draw any conclusions, for an ‘non-cryptocurrency business’, the idea of “doing nothing” would have likely resulted in stronger comments suggesting risks of non-compliance and/or tax evasion.
Until IRD clarifies their position, NZ business involved in cryptocurrency have potential GST risks. However, based on the current landscape, IRD are aware of these uncertainties and risks for NZ businesses.
We are Chartered Accountants who prepare financial statements and income tax returns that involve cryptocurrency. We also provide personalised tax advice to your individual circumstances.
This is only our interpretation and 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.