Many of our clients made some profits in the crypto market during the 2022 Financial year (from 1 April 2021 to 31 March 2022), and now they have to pay taxes which are due by 7 April 2023. But, some of these clients haven’t set aside enough money for taxes, and the market crashed, and some crypto exchanges went bankrupt in the 2023 Financial year. So now they’re struggling to pay up by the deadline.
We’ve been getting a lot of emails from worried clients about what to do if they can’t pay. If you miss the deadline, you’ll get charged with late payment penalties (LPP) and use of money interest (UOMI), which can add up fast.
LPP works in three stages: a 1% penalty on the day after the due date, a 4% penalty on the remaining tax, and a 1% penalty every month after that.
If you don’t pay enough tax, you’ll also get charged UOMI. The interest rate varies based on market rates and gets calculated daily. Right now, it’s 9.21%.
Our advice? Be proactive about paying your taxes and prepare now LPP and UOMI can seriously snowball and cost you a lot in the long run.
So what can you do? In all situations, we strongly recommend considering your own cryptocurrency investment strategy, future price expectations and risk profile.
One option is to sell your cryptocurrency to pay the tax. Being accountants (and seeing how quickly LPP and UOMI can compound from IRD), this is our recommended option because it ensures compliance and meets your tax obligations. We are aware that some of our clients think the market will bounce back and will be okay with effectively leveraging their tax funds to stay invested in the market. It is extremely risky to not pay your tax and continue to hold cryptocurrency because you are not being compliant, and have potential significant market exposure to cryptocurrency price fluctuations.
If you cannot afford to pay your tax, you may be able to set up a payment plan with the IRD. You can apply yourself through myIR, or we can do it for you (we will charge a fee based on the time involved). You need to provide a reason why you can’t pay your tax on the due date. In our opinion, ‘because I don’t want to sell my remaining crypto at a low price’ might not be sufficient. Until tested with IRD we are unsure if this reason will be accepted. To request a payment arrangement, you need to provide
- Why you can’t pay your tax (be specific and detailed) – for example, “I can’t pay my tax because…”
- The frequency of your repayment (weekly, fortnightly, monthly etc.,)
- The amount of each repayment
- The duration of the payment plan (generally 6 – 12 months)
Finally, in extreme cases where paying the tax will cause significant financial hardship, you can apply for financial hardship. In this case, some or all of your tax might be written off. This situation will only apply if meeting your tax payments will cause extreme financial hardship. If you own any material or liquid asset (cash, property, or cryptocurrency), it’s unlikely the tax will be written off.
Got any questions? Give us a shout! We’re happy to help.
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.