IRD have released a consultation paper about an exclusion of GST and financial arrangements to cryptocurrencies.
In summary, IRD propose to exclude GST and financial arrangement rules from cryptocurrency retrospectively from 1 January 2009.
This is positive news for New Zealand cryptocurrency taxpayers. IRD addresses the most pressing cryptocurrency tax issues we have previously discussed with them. It appears they have listened and understood taxpayers concerns with existing tax legislation.
Currently the changes are only proposed for consultation and are not law.
The proposed changes are outlined below intersected with commentary. They only apply to GST and financial arrangements and there is no commentary about existing income tax legislation.
The current cryptocurrency GST tax position (as at 26 February 2020) is outlined in our earlier article Cryptocurrency and GST in New Zealand.
IRD have outlined that:
- Crypto-assets often do not fit into existing tax definitions that were designed for other investments products. Because of their innovative nature, they will often also have different features.
- “…existing tax rules can be difficult to apply, involve very high compliance costs…”
- Previous discussions about classifying tokens and applying differing tax treatment to different types of tokens, may have practical limitations. Furthermore, the is no universal standard for classifying tokens and would be difficult to identify the type of token.
- “because of the complexity of the GST treatment and the limited information available… the current GST rules can be difficult to play or impractical to comply with”.
Removing cryptocurrency from GST
The issues paper proposes that GST is removed on cryptocurrency by either:
- Making all supplies of cryptocurrency not subject to GST. This would have the same GST treatment as supplies of money.
- Making supplies of cryptocurrency GST exempt to NZ residents and zero-rated, (subject to GST at 0%) to non-residents.
Option (a); a blanket removal of GST from cryptocurrency is more appropriate for taxpayers. This could result in the same GST treatment to residents and non-residents and cover a broad definition of all cryptocurrencies.
Option (b) would still require compliance costs of preparing and filing GST returns for taxpayers who sold more than $60k of cryptocurrency per year. In our experience, $60k trading volume is very easy to exceed (compared to an alternative business). For example, trading the same $10k of cryptocurrency between tokens six times (excess of $60k turnover) would mean the tax payer has to be GST registered.
Making supplies to NZ residents exempt, but supplies to non-residents GST zero-rated, encourages taxpayers to use offshore exchanges. IRD echo this view of hindering the development of NZ dollar market for cryptocurrency. Finally, some NZ taxpayers are involved in trading offshore, but also use NZ exchanges as fiat on/off ramps. This mix of supplies would increase compliance time and costs having to account for both GST exempt and GST zero-rated transactions. The options do no not affect the total amount of GST collected by IRD.
Overall, removing GST from cryptocurrency is positive for taxpayers. It provides simplicity and enables cryptocurrency to be consistent with the GST treatment of money and other similar financial investments (shares).
Cryptocurrency exclusion from financial arrangement rules
If financial arrangement rules are applied to cryptocurrency, tokens classification results in some tokens being taxed on realised gains, and others on unrealised gains. The volatility of cryptocurrency can make difficult or unfair for tax purposes. For example, an increase in price between purchase date and the end of the financial year may result in a significant unrealised (taxable) gain. However, after the financial year, the token price may have depreciated in value by more than 70% (this was not uncommon after 31 March 2018), and the taxpayer still has a tax liability based on an unrealised gain (despite the underlying token losing value after the financial year).
Furthermore, classifying tokens (and there are over 5,000 different cryptocurrencies), has practical limitations as there are no universal standards. Some tokens may have hybrid characteristics, may change as the token develops, or there may be future tokens with new characteristics that currently don’t exist.
IRD have mentioned that different taxation treatment between token classification may lead to bias investment decisions about which type of cryptocurrency investors may prefer to invest in.
It “seems more appropriate and practical to tax cryptocurrency at the time they are sold (or exchanged for other tokens) rather than on accrued gains or losses.” We agree with IRD on this position.
The issues paper proposes that the relevant law changes to exclude cryptocurrency from GST and financial arrangement rules should apply retrospectively from 1 January 2009, the date the first cryptocurrency, bitcoin, was launched.
This is positive for NZ taxpayers. It removes any uncertainty and risks associated with previous non-compliance. Previously we have advised our clients to “do nothing” about GST. This has resulted in many of our clients not applying GST or the financial arrangement rules to their cryptocurrency. This latest proposal now provides confidence and certainty to that course of action.
The paper confirms that traders who have a business of dealing in cryptocurrency should be taxed under the trading stock rules. We have previously outlined the tax differences between traders and investors including trading stock tax principles.
While this update is welcomed and addresses the most pressing issues our clients have experienced, it has taken more than years two since our first conversation about GST and cryptocurrency with IRD.
Further clarification and/or tax changes in other areas within cryptocurrency are required also, such as:
- Staking of tokens to earn passive income and capital classification of tokens
- “de-fi” arrangements which may combine an element of staking rewards and financial arrangements (such as redemption in a future year for a different value).
- Using cryptocurrency like money for private transactions, or actual use cases of cryptocurrency
- Tax implications of migrating or leaving NZ and how temporary foreign tax exemptions may apply
- What classifies someone as a cryptocurrency trader compared to a speculative investor
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.