In recent months, we have had many difficult conversations with cryptocurrency clients about their tax liability for the 2022 financial year (from 1 April 2021 to 31 March 2022). Many of our clients made significant profits in the 2022 financial year but have since seen the market crash (or have lost crypto in Celsius, Luna, or FTX). Some are now left with a significant tax liability and little to show for it.
It is not unusual for clients to have made substantial profits from exchanging tokens at the market’s peak. But now, they are facing a challenge in meeting their tax obligations. This challenge may be due to underestimating their tax liability (or turning a blind eye at the time) and recognising a significant decrease in the value of their holdings after 31 March 2022.
Many clients began the 2022 financial year with cryptocurrency tokens on a low cost basis. They then diversified their investments by selling some of the tokens to purchase other tokens. This caused them to realise gains on the original tokens sold (profit = sale value less acquisition value). Additionally, they may have locked tokens into staking contracts to earn yield. These staking rewards are considered income at the market price on the date they were earned. At the peak of the market, these staking rewards were significant.
Some clients may need to sell all their cryptocurrency assets to raise sufficient cash to pay their 2022 tax obligation due on 7 April 2023. It seems like such an extreme outcome; however, it appears to be the only option in many cases.
In the 2023 tax year (from 1 April 2022 to 31 March 2023), many clients have experienced losses from their cryptocurrency activity.
Losses can only be used to offset income during the same tax year or carried forward to offset future income (they do not expire until fully used). They cannot be carried back to offset prior years’ profit. In our opinion, this inability to offset losses against prior year profits is unfavourable to cryptocurrency clients (or any investors or business owners who invest or operate in such a volatile industry), and we encourage IRD to change tax legislation.
We stress the importance of strategy, tax planning, and cash flow management. Your responsibility is to understand the tax rules and how they apply to your situation. For example, it may be prudent to dispose of some crypto into fiat to hold for tax payments compared to keeping all cryptocurrency invested and subject to market volatility. Please contact us if you want to discuss your strategy.
So, what should you do if you’re in this position of having a significant 2022 tax liability and your crypto has dropped in value? There are options available. However, we stress it comes back to your intention and strategy. What is right for you may not be the best option for someone else. Some options to explore may be:
- Dispose of the balance of cryptocurrency to pay the tax
- Enter into a payment arrangement to pay the tax off over a 6 – 24 month period from other income sources or staking income. This is not without risk, as cryptocurrency prices could fluctuate further.
- Request financial hardship if you have no ability to pay the tax
- Ensure you understand how cryptocurrency taxes are calculated and factor tax into your strategy. This will prevent you from being in this situation.
However uncomfortable these situations may be, we recommend that you take action and don’t delay. IRD late payment penalties and IRD interest can snowball significantly to only compound matters worse.
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.