A shoe shop sells a pair of shoes to a customer – a taxable event. The difference between the sale price to the customer, and the cost price from their supplier, is profit.
Like the shoe shop, the sale of a cryptocurrency token is also a taxable event. The sale of a token can occur like a retail transaction (the seller receives $NZD), or, it can be a trade for a different token (the seller receives another cryptocurrency). In both situations the difference between the sale price and the cost price is profit.
The profit is more difficult to calculate from cryptocurrency trades because the price is not recorded in $NZD. Instead, the trade must be converted to the market value of the traded token on the day, normally in $USD, and then converted to $NZD using a foreign currency exchange rate.
The table below outlines key differences between trades, and retail transactions:
A Trade – exchange of one token for another
A trade is recorded as a sale, because a token is being disposed; it is no longer owned. And at the same time, a new token acquired is recorded as a purchase. As outlined in the examples below, the sale price of the disposed token must equal the cost price of the purchased token.
When preparing financial statements and calculating profit, trading information must be downloaded from exchanges. The trading information will show the date, the quantity of the token sold and quantity of the token purchased. The date can then be used to look up the market value of the token on that day and converted to $NZD. This value is then recorded as both the sale and purchase price for the tokens traded.
Once each trade has a sale and purchase price, a profit and loss statement can be prepared. A deduction is not allowed for unsold tokens (closing stock).
Consider the following events:
- Purchase of 1 BTC for $10,000 NZD
- Trade 1 BTC for 10 ETH (the BTC price was $15,000 on this day)
- Trade 5 ETH for 100 ABC (the ETH price was $500 on the day)
Event 1: Purchase 1 BTC for $10,000 NZD
There is no disposal of cryptocurrency, so no taxable event.
Note that no deduction is allowed for the closing stock as it has not yet been sold.
Event 2: Trade 1 BTC for 10 ETH (BTC price was $15,000 on this day)
Sale of BTC – this is a taxable event.
At the same time, purchase of ETH (to complete the trade).
The sale price of the BTC must equal the purchase price of ETH.
The cost value of the BTC is from event 1.
There is no taxable event for ETH (because there is no sale), but, the cost value must be recorded. When ETH is disposed in the future, the profit is calculated as the difference between the sale price and the cost price.
Event 3: Trade 5 ETH for 100 ABC (ETH price was $500 on the day)
Sale of ETH – a taxable event.
Only 5 ETH tokens (half) are sold. Therefore, 5 ETH are still on hand as closing stock.
A deduction is allowed for the 5 ETH that have been sold (not the other 5, which are still owned). This is $7,500 $NZD.
At the same time, ABC is purchased (the trade).
The sale price of ETH must equal the purchase price of ABC.
What we do
We take all of your trading data from all exchanges and convert it to a standard format. Then we convert each trade to $NZD (based on the market price on the date of the trade). This allows us to calculate your profit/(loss) for the year.
We also reconcile your portfolio to ensure that all of your trading data is captured and complete. We check your unsold closing tokens recorded in the financial statements, match what you are holding in wallets or on exchanges.
For example, your trading data may show you have 5 ETH and 100 ABC token on hand (like in the example above), but actually, you may only have 100 ABC and 2 XYZ token; therefore, we know something is missing (such as trading information from another exchange or lost tokens). This ensures that you are not paying more tax than necessary on tokens you do not own.
We provide you with tax advice on your personal situation and provide certainty of any future tax payments including the amounts and due dates.
Contact Tim Doyle (firstname.lastname@example.org) 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 or telephone 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.