This article outlines what triggers a taxable event and how to calculate the profit on cryptocurrency transactions. An individual taxpayer includes their profit for the financial year (1 April to 31 March) in their income tax return. The profit is combined with their worldwide income and the taxpayer pays tax on the profit at their marginal tax rate. Examples below step through increasingly complex tax calculations of purchasing and selling Bitcoin with $NZD.
This recent article explains why cryptocurrency is taxed under current income tax legislation.
What triggers a taxable event?
A realised profit, triggers tax to pay for the financial year the profit was earned. Tax is only payable when profits are realised. In summary:
- Buying crypto is not a taxable event (see example 2 below).
- Selling crypto for fiat (e.g., NZD) is a taxable event (examples below)
- Using crypto to purchase goods or services is a taxable event.
An unrealised profit is when the market value of a token is higher than the original purchase price. However, because the token has not yet been sold, the profit is unrealised, and there is no taxable event.
All trades during the financial year (1 April to 31 March) are combined to report a single profit/loss which is included in an income tax return.
How to calculate taxes on cryptocurrency transactions?
Profit is calculated using the formula: sale price – purchase price = profit
Example 1:
Situation: John purchases 1 Bitcoin for $20,000. John sells 1 BTC for $50,000.
Result: Using the profit formula above: Sale price ($50,000) – purchase price ($20,000) = $30,000 profit.
Outcome: John includes $30,000 profit in his income tax return.
What about Opening and Closing Stock?
Cryptocurrency held at the beginning of the financial year (purchased in a prior financial year but not sold in that year) and held end of the financial year (purchased during the current financial year but not sold) also need to be consider (known as opening and closing stock).
As outlined above buying cryptocurrency is not a taxable event. The closing stock (purchased during the financial year, but not yet sold) is added back. It is still owned and therefore no tax deduction is allowed.
The profit formula above can be updated to including opening and closing stock as follows:
Profit = sale price – opening stock – purchases during the year + closing stock
Example 2:
Situation: John purchases 1 Bitcoin for $20,000 in February 2020. On 31 March 2020 (the end of the financial year) John still owns 1 BTC.
Result for the 2020 financial year: Using the profit calculation formula: sale price ($0) – opening stock ($0) – purchases during the year ($20,000) + closing stock ($20,000) = $0 profit for the year ending 31 March 2020. Note the 2020 closing stock must equal the 2021 opening stock.
Outcome for 2020 financial year: no profit/loss.
Example 3 (continued from 2 above):
Situation: In the 2021 financial year, John sells 0.5 Bitcoin on January 2021 and the price of Bitcoin is $50,000 (0.5 BTC = $25,000). He still owns the remaining 0.5 BTC which has a purchase price of $10,000 (purchase price of $20,000 x 0.5 still owned)
Result for the 2021 financial year: Using the profit calculation formula: sale price ($25,000) – opening stock ($20,000) – purchases during the year ($0) + closing stock ($10,000) = $15,000 profit for the year ending 31 March 2021.
Outcome for the 2021 financial year: John includes $15,000 profit in his income tax return.
Example 4:
Situation: John purchases 1 BTC for $20,000 in February 2020. On 31 March 2020 (the end of the financial year) John still owns 1 BTC. In November 2020, John buys 2 BTC for $20,000 ($10,000 each). John sells 2 Bitcoin in January 2021 and the price of Bitcoin is $50,000 ($100,000 total). John still owns 1 BTC on 31 March 2021
Result for the 2020 financial year: Sale price ($0) – opening stock ($0) – purchases during the year ($20,000) + closing stock ($20,000) = $0 profit. Note the 2020 closing stock must equal the 2021 opening stock.
Result for the 2021 financial year: Sale price ($100,000) – opening stock ($20,000) – purchases during the year ($20,000) + closing stock ($13,333*) = $73,333 profit for the year ending 31 March 2021.
Outcome for the 2021 financial year: John includes $73,333 profit in his income tax return.
Closing Stock:
The closing stock above of $13,333 is calculated using a weighted average cost (WAC) method. John purchased 3 BTC for a total of $40,000 (or $13,333 each). On 31 March 2021 he still owns 1 at the WAC of $13,333, hence this is the closing stock value. The closing stock will become the opening stock value for the 2022 financial year.
Contact Us
Contact Tim Doyle for a 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.
Hi Tim. If I’ve made a loss (from crypto or stocks – daytrading), can it offset my regular income? I trade part time (almost every day) but suffered a heavy loss during the coronavirus panic.
I would imagine it can, otherwise it wouldn’t make sense to tax it as income? Is it as simple as taking my regular income, minus the trading losses and paying the margin tax rate on that overall income for the financial year?
Yes, as outlined above: The crypto profit (or loss) is combined with their worldwide income (employment income, business income, investment income etc) and an individual pays tax on their income at their marginal tax rate.
If you have made a loss, and had tax deducted from your employment income, you will be entitled to an income tax refund.
How do Fees play in all of this? Do they count as losses? Business Expenses?
I ask because I’ve spent $4k on coins, moved them around all over a bunch of places to figure out what apps and exchanges I like. In that process I moved ETH around and paid $700 in gas fees. Now I have ~$2700 total across my wallets. Does this get counted in my global income as -1300?
Would that 1300 count against the GST I’m liable for for exchange trades?
Fees are deductible.
great article , makes a lot easier to understand but my situation seems very complex and cant seem to figure it out 🙁
Contact us to see if we can help
So I just need to understand staking rewards tax correctly. So I understand I have to calculate my crypto staking rewards at time it was received and what value each coin in NZD at the time of receiving the staking reward. What I dont understand is what is the tax % on crypto staking rewards? I dont trade and i haven’t sold any i just purchase and hold/stake them
The tax you pay on the rewards will depend on your total income. More information here: https://cryptocurrencytax.co.nz/2021/01/12/how-much-tax-do-i-pay-on-my-cryptocurrency-profits/
Hi Tim,
Is there is guidance on the tax implication of buying/selling NFT’s?
Recent example: I recently bought an NFT for 0.5 ETH, and just sold it for 3 ETH. Any advice on that?
Likely taxable under s CB4. Will depend on your intention when buying the NFT in the first place…
Hey Tim,
If one was self-employed/sole trader, and sold crypto for a profit (separately from the business) in the current financial year, but immediately re-invested it into company expenses / assets etc to the point where very little overall income was made by the end of the financial year (from all sources) – are the crypto profits still taxable? Or is the tax on the total global income for the individual minus expenses?
Many thanks
Yes, the profit is taxable. This is calculated as the difference between what you purchased the crypto for and what you sold it for. The fact it has be re-invested is irrelevant. The issue you have here is that individual is a separate entity from the company. So the company expense cannot be offset against the individuals crypto income (unless the company is a LTC).
How about if the individual is not a registered sole trader, but has the main income a salary from an employer, and on top of that does contracting work/freelancing now and then throughout the year, and in the same time makes a profit out of crypto trading? Can you deduct the tax that you have to pay from the contracting/freelacing income from the crypto trading losses during the year?
Hey Tim,
I’m just getting started, only invested a couple hundred, lost some, gained some, by the end of March I might have made less than $100 over all.
Do I need to go through and work out all my profit/expenses and declare it with such a small amount?
Yes.
Hi Tim – great article. By any chance do you know what the implications of moving overseas part way through the year is? I’m looking at taking up a job offer overseas in early June (will cease tax residency, won’t be back for 1+ year), would this mean I only owe tax to NZ on any “income” derived from selling crypto before I leave the country? I wonder if it’s best to hold positions until then if where I’m moving has a more favourable tax rate, but not sure if I’m liable for the entire financial year or just the part I was resident.
You need specific advice for this. It will depend if you are in business, or an investor, and potentially where you purchased the crypto from (NZ sourced or overseas). There are moving parts to consider which will affect the tax outcome.
Hi Tim
I have just sold some Crypto for a small amount around $700
1. Am I liable to pay tax in NZ and the U.S? or just NZ?
Thanks in advance
You need to pay tax if you are a NZ tax resident, or have purchased/sold the crypto from NZ (and therefore it has a NZ source). If you need to pay tax in the US will depend on your specific tax residency.
Capital Gains of crypto currency investing: it there any circumstance which crypto assets (and realised profit) are considered capital gain? In which case NZ doesn’t have capital gains tax?
At this stage there is not. Cryptocurrency is taxed under s CB4 of the Income Tax Act which makes the distinction between capital and revenue irrelevant. We’ve outlined further information about this on our latest article: https://cryptocurrencytax.co.nz/2021/04/29/is-cryptocurrency-taxable/
Hi Tim,
If someone is gifted some crypto and they sell it – who pays the tax? Is it the person who gifted it, or the person they gave it to who subsequently sells it?
Thanks!
It depends. Who did they gift it to? are they associated persons? what was their intention at original acquisition? This article covers further examples.
Hi Tim,
I made $1000 profit trading one crypto to another. $1000 profit is after I deducted my loss and fees. If my annual income is $100,000, how much tax is deducted from my $1000 profit? Thanks.
No tax is deducted. It’s not like you’re an employee and your employer deducts the PAYE and pays it to IRD on your behalf.
You have to manage your own tax payments, pay the amount to IRD. Decide if you’re going to cash out crypto to pay, or pay the tax from other fiat.
It’s likely you’d have a tax liability of $330 (33%) – as outlined more here: https://cryptocurrencytax.co.nz/2021/01/12/how-much-tax-do-i-pay-on-my-cryptocurrency-profits/
Thanks Tim. If I were to hold a crypto currency for more than 1 year and sold it at a profit of $1000, is the tax liability is also 33%?
Hi Tim,
What happens if you buy a stable crypto with the purpose to use it in exchange to buy another crypto (shtcoins-excuse my french-however people call these altcoins, not the major stable coins like bitcoin, ETH etc), because you can’t use fiat money to purchase that coins directly.
If you plan to buy let’s say $200 worth of ETH and the next minute you trade that $200 worth of ETH for the coin you wanted to buy in the first place. If you keep the new coin in your digital wallet without getting the fiat money $ from it – Is there any tax paid for these exchanges?
And second question, something that I really struggled to understand.
If you buy today an altcoin worth $100 and in 2 days time is worth $500 and you trade it for $500 worth of bitcoin and you keep that bitcoin in your wallet for the next year or more, without withdrawing/cashing out the money, is there any tax to be paid? (considering you keep that money invested in long term investment and you don’t have the money physically in your bank account to pay taxes for it)
Thank you for the high quality information.
I understand that intention is considered when calculating tax. Similar to the question above, what happens if you make an unintended profit?
1. You hold alt-coin A
2. You want to purchase alt-coin B
3. You need to swap alt-a into a stable (eg usdt) to buy alt-b.
4. During the swap from alt-a to usdt, you made a profit, albeit unintentionally.
Another way of framing – are buying stablecoins a taxable event, if they are just being used as a utility? And would selling stablecoins (buying alt-b) come under the same umbrella ?
Thanks Tim!
The unintended profit is taxable.
In the case of stable coins, they are still cryptocurrency (property) and therefore taxable on disposal. Buying is not a taxable event. On disposal, the profit is calculated as the difference between the purchase price and the sale price. For a stable token you would expect the prices to be the same (maybe some foreign currency gain), so therefore, although it would be a taxable event, the profit/loss is likely to be $0.
Kia Ora Tim,
What is the tax rate on short trades?
Thanks!