Hidden Complexities of Buying Cryptocurrency for Someone Else

Sometimes, people might buy cryptocurrency on behalf of another. A friend or family member may say, “Hey, here’s $10,000. Can you get me some too?” At the time, it doesn’t seem like a big deal. But come tax time, it can create a nightmare, especially if there are multiple transactions and no clear understanding or agreements between you and the other person.

In short, we strongly recommend keeping your cryptocurrency separate from everyone, especially friends and family. As the saying goes, family, friends, and money don’t go well together.

Let’s double-click on the reasons why.

An example,

We’ve used a non- cryptocurrency example as a simplified version to start.

  • Sam gives Peter $20k.
  • Peter buys a car for $20k.
  • Who owns the car, Peter or Sam?
  • Was the $20k from Sam to Peter a loan?
  • Did Peter buy the car for Sam?
  • Who is the legal owner of the car?
  • Who’s name is on the title (change of registration/ownership with NZTA)?
  • What was the fundamental nature of the agreement?

Loan Agreement

If the $20k was a loan from Sam to Peter. Peter owes Sam $20k.

If Peter crashes the car, and the car’s value drops to $1k (because of the crash), Peter would still owe Sam $20k (even though the car might only now be worth $1k). With a loan, the lender (Sam) is protected from any crashes or thief of the vehicle. Likewise, Sam would not receive any gains if the car were to increase in value.

This is the same principle as a bank lending money to a property owner or developer. The bank is owed the money lent, regardless of what happens to the house’s value or the developer’s profits.

If the $20k is a loan, we recommend a loan agreement with details such as repayment terms, interest rates, and security, are included.

Agency Agreement

If Peter acts as an agent and buys the car with Sam’s money, Sam owns the car (despite Peter buying it). If this were the case, we would expect the vehicle to be transferred to Sam, and the car’s title would be in Sam’s name at NZTA. Sam would have possession of the car (in his garage). Sam’s name would be on the title. Peter has no liability for the car after completing the transaction for Sam and then passing on the car to him.

In Peter’s bank account, there would be a deposit of $20k (from Sam) and a withdrawal of $20k (to the car dealership). In Peter’s garage at home, there would be a deposit of the new car and then a withdrawal of the car (being sent to Sam). These events contra off each other.

The outcome of a loan agreement (the lender is protected from any price volatility) is materially different from the agency agreement (the agent is protected from any price volatility).

Application to Cryptocurrency

When you combine money with digital assets, it has the potential to become complicated and blurry. This is increased further by the not 1:1 nature of digital assets and cryptocurrency. In the car example, there is only one car. Peter can’t chop the car into pieces and then transfer it further into transactions. With cryptocurrency, you take a single token and have many micro transactions due to its fractional nature.

Example 2

Sam gives Peter $20k

Peter buys 1 BTC for $20k

Peter already owns 1 BTC that he purchased for $10k (unrelated to Sam).

Part 1

First, we need to understand the nature of the $20k from Sam to Peter. Is this a loan of $20k? Or has Peter purchased 1 BTC on Sam’s behalf?

Or have they formed a partnership and combined their portfolios and now have a 50% share in the portfolio? If so, what happens if one person wants their money out in an unequal proportion?

The nature of the agreement is fundamental to understand because it determines who owns the cryptocurrency and, therefore, who is responsible for any tax liabilities. These questions should be discussed before engaging in any transactions with others.

Part 2

Peter then takes 0.5 BTC and trades it for 3 ETH.

This creates more questions:

  1. From the 0.5 BTC sold, is Peter using his own BTC that he already owned before Sam purchased his? Therefore, Peter is subject to tax on the 0.5 BTC sale, and Peter is the new owner of the 3 ETH.
  2. From the 0.5 BTC sold, is this Sam’s BTC that is sold (from his $20k purchase), and therefore Sam is the new owner of the 3 ETH? However, even though the trade appears in Peter’s trading records, it’s actually on Sam’s behalf (Peter acting as agent). Consequently it needs to be identified and removed from Peter’s records because it isn’t Peter’s trade. Sam also needs to record this trade to keep a record of it so he knows the cost value of his ETH for his own taxes.
  3. From the 0.5 BTC sold, is this 0.25 BTC from Sam and 0.25 BTC from Peter going into the new 3 ETH, which would be jointly owned? If so, we need to account for the sale of 0.25 BTC of Sam, and 0.25 BTC of Peter in their respective financial statements, along with the purchase of 1.5 ETH each. This triples the amount of administration work required (once for Sam, once for Peter, and once for the joint position), not to mention the complexities.

This cycle could continue into micro-transactions due to the fractional trading nature of cryptocurrency.


  1. Keep your cryptocurrency separate from everyone. You may think you are helping your friend out, but really, you’re opening yourself to more administration work and potentially paying tax on their behalf to IRD.
  2. In the exceptional case that you do buy cryptocurrency on behalf of someone else:
    • Have an explicit agreement (about the nature of the contract and what they are buying). For example, Sam gives Peter $20k to purchase 1 BTC on Sam’s behalf.
    • Immediately move the cryptocurrency into a separate wallet for the other person. Do not combine it with your own holdings.
  3. Keep clear and concise records of the transactions, the nature of the agreement, and the reasons why. The blockchain proves ownership of cryptocurrency, but there are no ties from the wallet holder to the legal holder, i.e., this wallet is owned by Sam.
  4. Don’t hold cryptocurrency on behalf of others. There are minimal reasons why you should keep cryptocurrency on behalf of another person. If they cannot buy cryptocurrency themselves or store it safely, should they really be the type of person who is investing in cryptocurrency?
  5. Understand that IRD may come after you (not your friend or family member) for any cryptocurrency tax. In 2020, Inland Revenue requested all data from NZ cryptocurrency retailers such as Easy Crypto, BitPrime, Dasset, etc. Inland Revenue would likely ask the account holder for any tax owing, not the person the cryptocurrency was purchased for.
  6. Consider any AML and KYC risks with exchanges and retailers. If you have completed AML protocols on an exchange or retailer and now using someone else’s money, consider if you are in breach of any terms and conditions.

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.

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