This article is about the first instalment of 2023 provisional tax due to the IRD on 28 August 2022.
This tax payment is calculated based on the 2021 tax amount plus 10% or the 2022 tax amount plus 5%. If you do not expect to make a profit in the 2023 financial year, there is no need to pay tax. We have also published a video here for those clients who prefer video (and embedded below).
An example (the principle of provisional tax)
On 31 March 2022, you go to a restaurant for a meal. At the end of the meal, you pay the bill.
Because you went to the restaurant for a meal in the 2022 financial year, the restaurant expects you to return in the 2023 financial year and spend 105% of your last bill.
Rather than letting you pay the bill after the meal, they charge you one-third of the bill upfront (in advance) on 28 August 2022. This bill is due during the financial year, even though you’re unsure if you will go to the restaurant for a meal again.
Welcome to provisional tax. For ordinary businesses with predictable revenue, provisional tax can be great for tax planning, consistency, and predictability. For cryptocurrency taxpayers, it is like a square peg trying to fit into a round hole; it clashes, due to uncertainty over the markets and profitability.
Let’s break down the earlier example and apply it to provisional tax.
On 31 March 2022, you go to a nice restaurant for a meal. At the end of the meal, you pay the bill.
You make a profit (the meal) for the 2022 financial year. After the financial year, you pay your tax (the bill) to IRD (the restaurant).
Because you went to the restaurant for a meal in the 2022 financial year, the restaurant expects you to return in the 2023 financial year and spend 105% of your last bill.
Because you made a profit (had a meal) in the 2022 financial year, IRD (the restaurant) expects you to make a profit in the 2023 financial year and charges you 105% of the 2022 tax amount.
Rather than letting you pay the bill after the meal, they charge you one-third of the bill upfront (in advance) on 28 August 2022. This bill is due during the financial year, even though you’re unsure if you will go to the restaurant for a meal again.
Instead of paying the tax to the IRD after the financial year finishes (after the meal), IRD (the restaurant) charges you one-third of the 2023 tax amount upfront on 28 August 2022. This tax payment is due during the financial year, even though you’re unsure if you’re going to go make a profit in the 2023 financial year.
What to do?
Are you going back to the restaurant for a meal in 2023?
Are you going to make a profit in the 2023 financial year?
No? Then, there is no need to pay the IRD any 2023 provisional tax. You could have left the city, and therefore it’s highly unlikely you’d go back to the restaurant – you could have sold all of your cryptocurrency on 31 March 2022; therefore, it’s highly unlikely you’re going to make a profit in the 2023 financial year (you have no crypto left to sell!). Be careful though; there are still ten months left of the financial year left, and you could choose to buy back in.
Yes?
Then, consider,
Is my 2023 profit going to be as large as the 2022 profit?
Yes?
Then, consider paying the 2023 provisional tax.
No?
Then, pro-rata the 2023 provisional tax amount is based on the proportion of the 2022 tax amount. For example, if in 2022 you pay $300k of tax, but you’re expecting 2023 profit to be 1/3 of the 2022, adjust the 2023 tax amount to be 1/3 of the provisional tax obligation.
What happens if I don’t pay or get it wrong? What is the worst that can happen?
In this case, we’d recommend using tax pooling to buy back dated tax (with an effective date of 28 August 2022) so that from IRD’s perspective, they receive the tax when it should have been paid. Tax pooling providers charge interest on these arrangements at ~6% pa.
Therefore, your maximum exposure is 6% interest on any shortfall paid tax.
We recommend you seek specific tax advice from us in these situations.
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.