You need to keep records for your cryptocurrency activity.
Having a system for keeping accurate tax records, and storing them in an organised way will make it more efficient to prepare financial statements, answer queries from IRD, provide information to banks or other corporations and meet anti-money laundering (AML) requirements such as proof of wealth.
This article outlines:
- Why you need to keep records
- What records you need to keep
- A system for keeping records
- Storage options
- Practical recommendations
It can be difficult to show evidence of ownership and keep records due to the nature of cryptocurrency – being decentralised and digital. Cryptocurrency exchanges keep limited records. CSV files can be adjusted or manipulated. IRD will accept an ANZ bank statement showing a closing balance and transaction history as evidence of $NZD on hand, spent and received. In comparison, decentralisation does not allow for verification from an organisation with a higher trust. It is more difficult for IRD to accept that exchange records are an actual taxpayers trading history, or a digital wallet belongs to the owner.
Why you need to keep records
It is a legal obligation to keep accounting and tax records for seven years. IRD can ask for this information.
Accounting records show evidence of transactions and create a timeline of activity; initial $NZD used to acquire cryptocurrency and what has happened with that cryptocurrency; traded, held in which wallet, staked, still own on hand (hodl), or sold back to $NZD.
Keeping accounting records for a non-crypto business is similar. They keep records of stock purchased, completed a stock take at the end of each financial year, store bank statements, invoices and record their sales. Their sales may be further broken down into which branch, or method of sale (online or retail), and even by which salesperson.
What records to keep
Original acquisition of cryptocurrency show how you first acquired cryptocurrency – a purchase of cryptocurrency from a cryptocurrency retailer such as Easy Crypto or BitPrime with $NZD.
Records to keep:
- Bank statement showing withdrawal of $NZD from the bank account to the retailer
- Confirmation email (receipt) from the retailer
- CSV file downloaded from the retailer to show purchase information
- Where the cryptocurrency is stored (wallet address)
If the original acquisition was received as a gift from a friend or family member, make a note of who gifted it, date received, type and amount received. There are taxable implications on gifting and/or receiving cryptocurrency which we have previously outlined.
Sale and trades of cryptocurrency are taxable events and need to be captured. Keep accurate records to show what has happened with each cryptocurrency token. Do you still own it? Has it been sold? If sold, what date was it sold? What exchange was it sold on? Was it sold for $NZD, or did you receive another token in exchange? Trading a cryptocurrency token for another is a taxable event and needs to be captured for tax purposes.
Records to keep:
- CSV files of trading history downloaded from exchanges. Most exchanges allow an export of trade history in a CSV format. This shows the date, quantity, token, and new token acquisition details. Every trade from every exchange must be captured.
Sale of cryptocurrency to $NZD:
- Bank statements showing $NZD deposited into the account
- Confirmation email from the retailer
- CSV file from the retailer to show your transactions
Cryptocurrency on hand. Keep records of cryptocurrency owned. You probably know how much you have and where it is stored, especially if it is valuable. However, it is surprising that some people do not know what tokens they own, where they are stored, or the quantity of each token they own.
Records to keep:
- An excel spreadsheet that outlines the different tokens owned, where it is stored (wallet addresses or exchange name), and the quantity.
- Regular time stamped screen shots provide evidence that what is held in wallets or exchanges match what is recorded in the summary sheet.
ICO Purchases. Participating in an ICO normally occur off exchanges. A manual record will be required.
Records to keep:
- Email confirmation of the ICO showing participation and cost (e.g., 10 ETH tokens deposited into wallet address xxx).
- Manual details of the token sent to the ICO (quantity and type) and the amount and token that is received in exchange for the ICO.
Expenses Paid. Traders may have expenses such as training courses, books, seminars, or subscriptions to carry on their trading business. In most situations these expenses will be paid online via a credit card and a receipt is received. If expenses are paid in cryptocurrency there is further information administration steps required to capture the transactions.
Records to keep:
- Receipt from purchase
- Bank statements showing the payment made in $NZD cost
- If payment made in cryptocurrency, the date, amount, type of cryptocurrency paid, who it was paid to and what for.
Transfers between wallets, or from wallets to an exchange. A transfer between wallets, or from one exchange to a wallet is not a taxable activity; however, we recommend keeping records that show the movement. Similarly, a transfer of $NZD from one bank account to another bank account (say from a transactional account to a savings account in internet banking), does not change the nature or ownership. It retains its ownership status (provided the same owner owns both accounts) and nature (it is not changing to another token or changing in substance).
Records to keep:
- Download a deposit and withdraw history from exchanges showing this information
- Download a wallet history transaction on a regular basis
Creating a system for keeping records
We recommend creating a system for keeping cryptocurrency records. By implementing a system throughout the year, the end of year tax process will be more efficient. It will also take less of our time (as accountants), which will result in lower accounting fees.
The system implemented will depend on your own activity. If trading more frequently, more regular checks may be appropriate. Adapt the system based on your specific activity.
You may do something now (such as transfer cryptocurrency to a staking wallet), and need to recall these details in 18 months-time (when preparing your tax return), or even four years later (should IRD review your tax return). You need to be able to recall the specific events and details of your activity.
- Every purchase of cryptocurrency with $NZD has the appropriate documentation stored (as outlined above).
- Make a list of the exchanges used for trading and the date used
- Download trading history from the exchanges at the end of each quarter. Exchanges can collapse (such as Cryptopia), and users unable to access their trading history. It is important to download history on a regular basis.
- Complete a quarterly stock take of all cryptocurrency held (summarised in excel, with supporting time stamped screen shots from wallets and exchanges)
- Keep a record of any transactions made off exchanges (for example, peer to peer, ICO’s, etc) at the time it happens.
- Keep a list of expenses incurred and paid at the time incurred. Include the date, how much, who it was paid to, what it was for. If it was paid in cryptocurrency include the token and quantity paid too.
We recommend storing your cryptocurrency records using:
- Cloud based storage (DropBox, Google Drive, SharePoint), that another user can have access to (such as your accountant to download the records). This way there is no need to email files back and forward.
- Organised into sub-folders for each financial year (and further subfolders for each quarter if appropriate)
- Each financial year has trading records, stock takes, expenses and other documents (outlined above) saved into each file
- File notes including information about intentions and strategies are documented and saved
- Copies of financial statements, tax returns, reporting letters from your accountant can also be saved and stored once completed.
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 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.