Marginal Tax Rates
An individual combines their cryptocurrency profits for the financial year (1 April to 31 March) and reports a single profit/loss amount to Inland Revenue (IRD) in their income tax return. The crypto profit 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.
This means, that as an individual’s income increases, they pay more tax on that increase of income.
Without knowing an individual’s total income (from all sources), we cannot calculate how much tax there is to pay, because it depends on the individual’s total income (not just crypto income). Refer to the differences in tax payable in example 3 and 4 below.
The table below shows the different tax rate for each income bracket.
Table 1 – Individual marginal tax rates:
|$0 – $14,000||10.5%|
|$14,001 – $48,000||17.5%|
|$48,001 – $70,000||30%|
|$70,001 – $180,000||33%|
An individual earning $76,000 does not pay tax on every dollar at the 33% rate. The system is progressive. The more earned, the more tax is paid. But, only on the extra amount. This why it is called a marginal tax rate.
The first $14,000 earned is taxed at 10.5%, then the next income bracket at 17.5% and so on. Only the amount earned over $180,000 is taxed at 39%.
Example 1: Income of $20,000 per year
An individual earning $20,000 of income per year, pays total tax of $2,520 or an equivalent tax rate of 12.6%. The tax amount is calculated as follows: $14,000 is taxed at 10.5% ($1,470 of tax), plus, $6,000 is taxed at 17.5% ($1,050 of tax), [$6,000 is calculated as $20,000 less $14,000], equals, total tax of $2,520 ($1,470 + $1,050).
Example 2: Income of $200,000 per year
An individual earning $200,000 of income per year, pays total tax of $58,120 or an equivalent tax rate of 29.1%.
This is calculated as follows: $14,000 is taxed at 10.5% ($1,470 of tax), plus, $34,000 is taxed at 17.5% ($5,950 of tax), $22,000 is taxed at 30% ($6,600 of tax), $110,000 is taxed at 33% ($36,300 of tax), $20,000 is taxed at 39% ($7,800 of tax), equals total tax of $58,120 ($1,470 + $5,950 + $6,600 + $36,300 + $7,800).
Income from cryptocurrency and employment – is there secondary tax?
There is no secondary tax.
The source of income is irrelevant to the amount of tax paid. For example, an employee earning $180,000 of employment income, pays the same amount of tax as an individual earning $180,000 of cryptocurrency income (or investment income, or rental income, or any other type of income).
The mechanism in which tax is paid to IRD is different for different income sources. Employees have their tax automatically deducted during the year and paid to IRD by their employer (PAYE, student loan etc). A business owner (including cryptocurrency taxpayers) must pay their tax to IRD from their profits.
Cryptocurrency taxpayers have a responsibility to manage their cashflow and make tax payments to IRD. Planning for tax, outlines decisions to consider and different situations regarding making these tax payments.
Example 3: Cryptocurrency Income Only
Alice receives no employment income. Alice earns $100,000 of cryptocurrency income during the year.
Her total income is $100,000 which she pays tax on at her marginal tax rate. The first $14,000 is taxed at 17.5%, the next $34,000 at 17.5% and so on… She has tax to pay $23,920.
Example 4: Employment income and Cryptocurrency Income
Alice receives employment income of $120,000 which has $30,520 of PAYE deducted during the year. If she had no other income, she has paid enough tax during the year (automatically deducted from her salary and paid to IRD by her employer) and no further tax would be required.
Alice also earns $100,000 of cryptocurrency income during the year.
Her total income is $220,000 which she pays tax on at her marginal tax rate. $60,000 of her cryptocurrency income is taxed at 33% (the marginal tax rate up to $180,000 of income), and $40,000 will be taxed at 39% (the marginal tax rate for income over $180,000). In this example she has tax to pay of $35,400.
In summary, although in both examples 3 and 4, Alice earns $100,000 of cryptocurrency income, she pays more tax at higher rate in example 4 (35.4% compared to 23.9% in example 3) because of the NZ marginal tax rate system. The more total income, the more tax is paid as a percentage of overall income.
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 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.