You have likely received an email in the past month informing you that IRD has requested client information from NZ cryptocurrency retailers. This includes your personal details and purchase/sale history. All businesses in NZ (regardless of industry) are legally required to give information to IRD when requested.
This article outlines my thoughts about the situation including, historical thoughts, what will they do with your information, how IRD have easy access to cryptocurrency information, how they may only have part of your information, effect of individual strategies and timing of taxable activity, what is declared in your tax return, and what may happen now.
I have been asked many times since the request for information “what does this mean for me” and this article attempts to answer that question. My perspective, (and I cannot be certain), is if you have filed your tax return and declared your cryptocurrency activity, IRD will not request any further information from you. I think that their focus (at this stage) is on those people who have not filed tax returns and are not complying.
I drafted an article in June 2019 but decided against publishing it (at the time) because I did not want to create unnecessary fear, or a perception of guilt. At the time, the Australian Tax Office (ATO) requested all customer information from cryptocurrency companies in Australia and I fielded media questions if this was going to happen in NZ.
My conclusion in June 2019 was that “IRD is not currently ready to apply a data matching process from cryptocurrency exchanges to New Zealanders tax returns. However, this is not to say that in two- or three-years’ time they will have their policy confirmed, then go back the past five yearsand review them. Should cryptocurrency prices increase significantly, this could potentially be a strong focus for IRD reviews.” To provide context, IRD had just finished their capital gains tax working group review and was in the process of their biggest IT upgrade.
What will they do with your information?
IRD have some of your cryptocurrency activity and I think that they will use data matching to see if you have filed an income tax return. If you have sold cryptocurrency but have not filed a tax return, you may receive correspondence from IRD. This could be a request for information, a friendly reminder to file your return, or a stronger action such as a review, or an audit.
If you have purchased cryptocurrency, they may look at where it was sent (wallet addresses) and what has happened with the crypto (was it sent to an exchange for trading etc).
Larger complicated transactions appear to have the most uncertainty or risk (rightly or wrongly).
How IRD have easy access to cryptocurrency information.
IRD have your information. They will immediately be able to see if you are compliant or not. Unlike other high-risk areas for tax avoidance (such as cash jobs in trades or hospitality) the crypto companies have a clear audit trail of your information. This appears to make the IRD matching process much simpler. It is difficult to prove you were not involved in cryptocurrency when IRD already have evidence you have brought and sold crypto.
How IRD may only have part of your information
As part of this information request, at this stage IRD are unlikely to access international trading exchange information. In our experience, clients have used 3 – 4 different exchanges outside of NZ (Binance, Bittrex, Kraken etc). If IRD do not have access to this information they will only have part of your trading history (from $NZD into crypto and vice-versa), but each trade is a separate taxable event that needs to be accounted for.
Because cryptocurrency is transferred on the blockchain, IRD may be able to follow transfers and request further information from you.
Effect of individual strategies & timing of taxable activity
Each taxpayer has a different cryptocurrency activity. The sale of cryptocurrency (whether a sale to $NZD or trade to another token) is a taxable event.
Trading or holding cryptocurrency have different tax treatments which also need to be considered. IRD are unlikely to have access to this information immediately from the data they have received.
In summary, from the information IRD obtain, they may know that you have purchased 3 Bitcoin, but they are unlikely to know when you have disposed it (unless you traded it, or sold it back on the same platform). The fact that someone has purchased bitcoin itself, does not make it a taxable activity, or create a need to file a tax return.
What is declared in an income tax return?
IRD receives the profit or loss in your tax return (which is added to your total taxable income). They do not receive the specific detail about how that the profit or loss is calculated (this is reported in the financial statements we prepare). Unlike other countries, In your tax return, there is no box to tick that declares your income is from cryptocurrency.
“I have filed my tax return already, what may happen now?”
As outlined in the introduction, I think the focus of IRD will be on non-compliance. However, if you have filed a tax return including your cryptocurrency activity, IRD may ask you for the profit calculation to determine how you have calculated the result.
Contact Tim Doyle 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.