This article outlines our:
1. Tax Summary for Cryptocurrency
2. Cryptocurrency End of Year Checklist
3. How we can help as cryptocurrency accountants and tax advisers
If you have any questions, please don’t hesitate to get in touch
Tax Summary for Cryptocurrency
IRD have a default position; if you acquired cryptocurrency for the purpose of disposal, gains or losses will be taxable.
There may be certain situations where IRD default position does not apply. Some examples may be acquiring tokens to create a master nodes (and earning a dividend like return), or acquiring certain security or debt tokens (having an equity position).
The justification is on the taxpayer to prove their tax position. A specific tokens characteristics provide no justification for the owners original intention. For example, if you purchase a security or debt token, it doesn’t default to a non-taxable position; you need evidence to support your tax position. You could still trade security and debt tokens to make profit which is taxable.
Gains and losses are recognised when a token is disposed. We emphasis that the disposal is the taxable event. A disposal includes a trade for another token, as you have disposed of your original token. For example, if you trade BTC to ETH you no longer own BTC, therefore the gains or losses on BTC will become taxable. Every trade needs to be analysed to determine the taxable profit or loss for the year.
There is no tax on unrealised gains or losses (in most situations). If you purchased a token for $1 and its price is now $2, the $1 profit is not taxable until you dispose of the token. This is also known as an unrealised gain.
If you are currently holding tokens with an unrealised loss (for example the cost of a token was $5, and the current market value is now $2), the loss is only tax deductible when you dispose the token. The $3 loss may be able to be offset against profits from other cryptocurrency trades or other income from outside cryptocurrency (for example employment income). If you currently have unrealised cryptocurrency losses, we recommend reading further information about tax loss harvesting here.
Cryptocurrency may be recorded as ‘trading stock’ for traders who are in the business of trading cryptocurrency. For traders, IRD accept that closing stock can be recorded at the lower of cost or net realisable value. If a tokens market value at 31 March 2020 (reliably measured through a reputable exchange), is lower than your cost price, there may be justification to record your closing stock at its market value. Therefore, you may not need to dispose of the tokens to recognise a tax-deductible write down in value. If you are not in business, this business concession will not apply to you. Read further information here about the tax differences between trading or holding cryptocurrency.
End of Year Checklist
- Record your tokens held on hand (stock take) at 31 March 2020. This could be screen shots of coins held on exchanges (try to include your account name/ID), or a screen shot of your public wallet addresses with the coins and quantity held. We understand that with digital assets it may be difficult to prove ownership and quantity held at a certain date and time, but it is a fundamental part of the accounting and tax process. This is no different from a normal business doing a stock take at the end of the financial year.
- Record and write off any coins that are not going to be recovered. This could include hacked exchanges, funds lost in crumbled cryptocurrency Ponzi schemes, tokens on exchanges that cannot be accessed, or small balances of tokens left on exchanges that are unable to be transferred or used.
- Download CSV files and transaction history of all trades on all exchanges used from 1 April 2019 to 31 March 2020. This captures the audit trail of information needed to determine your total sales, total purchases, and closing stock. Every trade can be analysed to calculate profit. Please do not edit these CSV files or try to format them.
- Download any bank statements that include deposits or withdrawals of cryptocurrency. These may include NZD bank accounts, and also foreign currency (FX) bank accounts (if applicable). FX bank accounts are generally taxed under the financial arrangement rules.
- Calculate your tax liability early. This allows for certainty over any upcoming tax payments and planning, including provisional tax if applicable.
- Record this information and keep it safe for seven years.
How we can help
We are Chartered Accountants who prepare financial statements and income tax returns that involve cryptocurrency. This includes speculators, traders, miners, futures traders, or those that provide a service using crypto (exchanges, joint investments, brokering).
We got started working in this space since mid 2017 and have been involved in IRD discussions about cryptocurrency taxes. We have clients all around New Zealand and internationally who are involved in cryptocurrency.
We take your exchange trading records, prepare your financial statements, calculate your taxable income and file your tax return with IRD. Financial statements prepared by Chartered Accountants may assist in providing information to your bank that support deposits of crypto to your bank account (this may assist with the banks Anti Money Laundering Act requirements).
We determine your tax liability, monitor your tax payments (including provisional tax payments) and can manage all correspondence with IRD on your behalf. We prepare an individualised tax strategy that can provide certainty to your future tax payments (amounts and due dates). This can be regularly updated depending on your trading activity, intentions and changing market conditions.
If you have other businesses (including companies or trusts) we can assess your total group position. This will be highly individualised depending on the nature of your other entities.
We also provide consultations on tax positions for other accountants and to clients for cryptocurrency tax.
Contact Tim Doyle (email@example.com) for a no obligation call or meeting to discuss any cryptocurrency tax or accounting questions. Our office is in Cambridge, Waikato, or we can arrange a video conference call.
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.