If you are purchasing cryptocurrency as a speculative investment to make money, you likely accept that any profits are taxable income. Likewise, if you are in the business of dealing in cryptocurrency you likely accept that business profits are taxable income (like other businesses). If you are purchasing cryptocurrency for other reasons, the proceeds from disposing cryptocurrency are still likely to be taxable income.
This article explains why cryptocurrency gains are likely to be taxable on disposal in most situations.
We have submitted multiple binding ruling applications to Inland Revenue Department (IRD) regarding cryptocurrency tax legislation. A binding ruling is where the facts of a specific taxpayer are outlined to IRD, along with our interpretation of the income tax legislation and how it applies to the specific taxpayer’s facts. IRD then make a binding ruling on those specific facts.
In all situations (so far), the taxpayers have been unable to provide clear and compelling evidence to support a non-taxable position. As we will see, this is difficult to do so.
To support a claim the cryptocurrency was not acquired for the dominant purpose of disposal needs to be supported by clear and compelling evidence. The onus is on the taxpayer to provide this.
I encourage and welcome commentary on this topic.
Classification of Cryptocurrency as Property
The High Court in Ruscoe v Cryptopia Ltd (in liq)  NZHC 728 confirmed that crypto assets are property. Personal property is property that is not land.
Inland Revenue refers to cryptocurrency as ‘crypto-assets’. This may be to ensure a careful distinction between ‘property’ and ‘currency’. This distinction of cryptocurrency as ‘property’, results in a specific legislation applying (as outlined below). If crypto was taxed as a currency, the legislation and profit calculation method would be different.
Section CB 4 of the Income Tax Act states:
“An amount that a person derives from disposing of personal property is income of the person if they acquired the property for the purpose of disposing of it.”
It doesn’t mention anything about making profit, or gains – it is an ‘intention to disposal’ that is key.
A disposal includes:
- Using cryptocurrency for an intended use (such as disposing a utility token)
- Swapping the token for another token or back to fiat
- Gifting the token to someone else
- A method to remove your ownership
The leading case on s CB 4 is National Distributors c CIR (1989) 11 NZTC 6, 346 (CA). Richardson J said that where there is more than one purpose present, taxability turns on whether the dominant purpose was one of sale or disposition. He noted at 6,350 that this allows “a sensible focus as a practical matter on what was truly important to the taxpayer at the time of acquisition”.
Determining a person’s purpose is subjective.
The taxpayer has an onus of proof to establish to the balance of probabilities that the property (crypto) was not acquired for the dominant purpose of sale or another disposal.
As Richardson J said, the taxpayer’s statements must be assessed and tested in the totality of circumstances including the nature of the asset, the vocation of the taxpayer, the circumstances of the purchase, the number of transactions, the length of time property is held and the circumstances of the use and disposal of the asset (at 6,351). There are no one-size fits all approaches.
A position where property was not acquired for the dominant purpose of disposal needs to be supported by clear and compelling evidence.
What about distinction between capital and revenue, or property description?
There is no business or profit-making overlay to s CB 4 and the distinction between capital and revenue is not relevant.
Inland Revenue has also published (in QB 17/08) that merely describing property, or the reasons why it was acquired, do not answer the question of whether there was a dominant purpose of disposal.
For example, describing property as a long-term investment, a hedge against inflation, for portfolio diversification or as a store of value outside the monetary system is not sufficient to show a non-dominate purpose of disposal at acquisition.
Relevant factors about cryptocurrency
These factors need to be considered together with the taxpayer’s specific individual situation and facts.
IRD have previously commented: “Bitcoin and similar cryptocurrencies generally don’t produce an income stream or provide any benefits, except when they’re sold or exchanged. This strongly suggests that cryptocurrencies are generally acquired with the purpose to dispose them.”
The nature of cryptocurrency (intangible, digital, with no personal benefit to holding) strongly indicates that it was acquired for the dominant purpose of ultimately disposing of it.
Cryptocurrency is generally highly speculative with volatile values. This has been demonstrated by significant increases and decreases in the value of most tokens – especially in the 2017 bull run, subsequent decline in 2018, and again in December 2020.
If a taxpayer is borrowing money to purchase crypto, it is likely that the loan needs to be repaid. Therefore, a disposal of tokens is likely required and contemplated to repay the loan.
If a taxpayer is choosing to be paid in cryptocurrency (even a stable coin), it is arguable that the token is being acquired to dispose. This is because the token provides no tangible benefit to the receiver until ultimately disposed (when it can be used as a currency or converted into another token).
This is like money – it has no purpose when being held, until it is disposed for what the holder ultimately intends to purchase. Money is legal tender, government backed, and a currency for tax purposes. This means it has different tax law that applies to cryptocurrency.
Relevant factors about staking cryptocurrency and earning an income stream
We have also outlined relevant factors below when determining if a taxpayer has a dominant intention to earn an income stream from cryptocurrency, such as staking. Although staking may be a purpose on acquisition, it is unlikely to be the dominant purpose.
Staking returns may be attractive compared to other investment alternatives (i.e., 20% APR returns compared to bank interest of ~1% pa). At the time of writing, the value of tokens has generally increased considerably higher than the value of any staking rewards, such that the staking rewards could be said to be insignificant. For example, BTC may earn 4 – 6% APR on Celsius or Blockfi, however, the price of BTC has increased ~800% in the past 12 months.
Staking rewards are income (under ordinary concepts), however until they are exchanged for fiat, they are unrealised. The benefit to the taxpayer is arguable only tangible once the tokens are exchanged to fiat. Acquiring additional tokens through staking increases the overall amount of the tokens available. IRD considers this different to an investment in shares, or a rental property where the owner receives a cash dividend of rental income stream (in fiat). This is a clear distinction due to the classification of crypto as property.
If there is an absence of ability to stake at the time of acquisition (and no clear ability to stake at a particular time in the future), it is likely the taxpayer has not shown that staking was necessarily a purpose of acquiring the token.
Staking rewards don’t to provide a fiat income stream which could be used to repay loans (if the taxpayer has borrowed to purchase cryptocurrency).
Bullion tax cases where a disposal was non-taxable.
In IRD QB 17/08 Are proceeds from the sale of Gold Bullion Income? There are several cases in this document that outline the facts of each case, the outcome (taxable/non-taxable), and the reasons for the outcome. Most of the cases result in the proceeds of disposal being taxable.
I have outlined below a non-taxable case to demonstrate clear and compelling evidence of bullion not being acquired for the purpose of disposal. This case sets a required standard to show that cryptocurrency was not acquired for the purpose of disposal.
In Case Q109, the taxpayers were Asian immigrants to Australia. They purchased bullion to protect their capital and to provide for their children’s’ financial futures. This was in keeping with their cultural custom. They later disposed of the bullion and the outcome was that the proceeds from the sale where non-taxable.
The reason for this non-taxable position was because their purpose on acquisition was to acquire the bullion to gift to their children at maturity, in accordance with their cultural custom. The taxpayers’ financial position was sound at the time the bullion was acquired, and neither of them could foresee a future situation where it might be necessary for them to sell all or some of the bullion for their personal benefit. Furthermore, at the time of acquisition, it was probably not feasible for anyone to have confidently predicted the remarkable rise in the value of bullion, particularly over a short period of time.
Emphasis is placed on “no future situation where it was likely they would sell” (due to their personal financial situations prior to acquisition, and culture customs of the bullion passing to their children at maturity). Also, it was not feasible for predicting an increase in its value.
When looking at cryptocurrency – it is likely that cryptocurrency tokens will be subject to significant increases and decreases in value, and I am unsure of any arguable culture customs relating to cryptocurrency. Therefore, the evidence in case Q109 is unlikely to apply to cryptocurrency.
Due to the classification of cryptocurrency as property for tax purposes, (subject to s CB 4), a taxpayer needs to show clear and compelling evidence that cryptocurrency was not acquired for the intention of disposal. The onus of proof is on the taxpayer to do so.
Due to the known relevant factors about cryptocurrency, at the time of writing, and crypto being classified as property, this is difficult.
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.