We are often asked, what expenses can I claim for my cryptocurrency activity? The answer will depend on whether you are classified as an investor or a trader of cryptocurrency. Profit from both investor’s and traders’ sales of cryptocurrency is taxable income. However, they are taxed under different sections of the Income Tax Act. One is carrying on an active business activity, while an investor is a largely passive activity.
Generally, if you are a trader, you can claim a wider range of expenses than if you are an investor.
The Trader vs Investor Distinction
There is no hard and fast rule for determining whether a person is in the business of trading in cryptoassets or not. This is determined on a case-by-case basis. The Inland Revenue Department’s (IRD) guidance outlines that the main ways to tell whether you are a trader is by looking at the frequency of your transactions and how much time and effort you put into buying, selling or trading crypto.
Other factors to consider include the reasons for your transactions, whether your activity is organized and systematic, how long you hold your cryptoassets, and the amount you invest.
If you do not meet the criteria of being a trader, you are considered an investor.
The distinction between a trader and an investor is not related to whether or not you use a company for your activity either. A common misconception is that if you incorporate a company for your cryptocurrency activity, you will automatically be a trader with a business activity. This is not true.
Cryptocurrency investors may deduct the following expenses from cryptocurrency income:
- The cost of cryptoassets: This includes the amount paid and any transaction fees.
- Accounting fees
- Interest on money borrowed to buy cryptocurrency
- Interest paid to IRD for late payment of tax
If you are classified as a “trader,” you are in the business of trading cryptocurrency and may claim business expenses. For an expenditure to be classified as an expense, there must be a sufficient connection between the expenditure and the income-earning activity.
A trader can claim all investor expenses as well as business expenses such as:
- Hardware expenses: Such as computer equipment and computers used for business purposes
- Home office expenses
- Depreciation on equipment used for business purposes
- Interest on money used for business purposes
- Membership to associations and trading groups
- Work-related mobile phone and phone bills
It’s important to claim the correct expenses to make sure you pay the right amount of tax at the end of the year. It’s good practice to keep accurate records of your expenses and hold onto receipts.
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.