The surge in the popularity of Bitcoin ETFs has many New Zealanders wondering about the tax implications. Here’s a simplified guide to help you understand how a Bitcoin ETF or other Foreign Investment Funds (FIFs) are taxed in New Zealand.
Just because you invest in a Bitcoin ETF does not give us the required information to provide tax advice. A Bitcoin ETF is only the name of the investment. It could equally be a S&P500 ETF, or a NZX10 ETF. To provide correct tax advice, we need to know what you are investing in and the jurisdiction of that investment (i.e., the fine legal print); what are you actually investing in?
Therefore, to provide you with correct tax advice on the Bitcoin ETF you are investing in, please provide us with all the details and the investment disclosure statement. For example, (using a non BTC-ETF example), if you are purchasing shares in Smartshares US500 ETF, despite the name suggesting you are buying US shares, you are actually buying units in a Smartshare fund through the NZX (NZ stock exchange) – that then subsequently invests into the S&P 500. The fund is an NZ-listed company on the NZX, is structured as a Portfolio Investment Entity (PIE), and is taxed at a final rate of 28%. This is very different from buying shares in a Vanguard S&P 500 ETF, which is a share in a US company (and subsequently a FIF).
We have outlined a general overview of how Foreign Investment Funds (FIFs) are taxed below. We expect that most BTC ETFs will be taxed as FIFs, but we cannot be certain without knowing the legal details as outlined above.
You are taxed under the FIF rules if the BTC ETF you invest in qualifies as a FIF (i.e., investments with a cost basis of more than $50k and an overseas investment). These are very different from how ordinary cryptocurrency investors are taxed. We expect the FIF rules to be more favourable from both a tax and record-keeping/administration perspective for many clients. However, as the saying goes, “not your keys, not your crypto”. Any investment has risks, and we recommend that you seek independent financial advice for any investment.
Overview of the FIF tax rules and how they may apply to a BTC ETF FIF investment.
Step 1: Know if the FIF rules apply to you
The first step is to calculate the cost base of all your FIF investments. This is the total amount you originally paid (in NZD) for all your FIF holdings, not their current market value. You can usually find this information on your brokerage statements or investment platform (or total your investments from your bank statements).
If the cost base of your FIFs stayed under $50,000 throughout the tax year (1 April to 31 March), you are exempt from the FIF rules. This is known as the de minimis exemption. Instead, you only pay tax on any dividends you earn. This is calculated by totalling the gross dividends (converted to NZD) and declaring them as income on your IR3. Any tax credits paid overseas may also be deductible in NZ.
If the cost basis of all FIFs is more than $50,000, continue reading below.
Step 2: Choose your tax calculation method
If your cost base exceeds $50,000 at any point during the year, an individual can choose between FDR and Comparative Value (CV). There are other methods, but for simplicity, we have outlined the two most frequently used methods.
- Fair Dividend Rate (FDR):
FDR assumes you earned a 5% dividend on your FIFs. This is a “deemed” rate of return, regardless of the actual dividends you received. For example, you could receive a dividend yield of 1%, or 15%, but only be taxed at the 5% deemed rate of return.
To calculate the FDR income, multiply the market value of your FIFs on 1 April by 5%, and that is the amount of income you will return to IRD. Again, this is irrelevant to what happens to the market value of the FIF during the year or at the end of the financial year.
If you purchased and then sold the same FIF asset within the same tax year, an additional calculation called a “quick sale adjustment” is required. You can find more detailed instructions for this adjustment on page 15 of the IRD’s Guide to FIFs.
- Comparative Value (CV):
This method calculates your actual investment growth. Below is a simplified breakdown:
- Value 1: Add the opening market value of your FIFs on 1 April to the cost of any new units you bought throughout the year.
- Value 2: Add the closing market value of your FIFs on 31 March to any dividends and sale proceeds you received throughout the year.
- Subtract Value 1 from Value 2. If the result is positive, that’s your FIF taxable income for the year. If it’s negative, you made a loss and didn’t owe any FIF tax. Losses cannot be used to offset your other taxable income.
Example
The market value of Liam’s FIFs on 1 April was $80,000. He invested a further $20,000 throughout the year, made no sales and earned $100 in dividends. The market value of his FIFs was $110,000 on 31 March.
FDR Method: $80,000 x 5% = $4,000 of income to return
CV Method
- Value 1: $80,000 + $20,000 = $100,000
- Value 2: $110,000 + $100 = $110,100
- $110,100 – $100,000 = $10,100 of income to return
In Liam’s situation, the FDR method results in less income to return to IRD (and subsequently less tax to pay).
Step 3: Pay your FIF tax
The FIF income is returned to IRD in a taxpayer’s overseas income field and pays tax at your marginal tax rate. Any overseas tax you already paid may be claimed as a foreign tax credit, potentially reducing your NZ tax liability. The overseas tax is limited to the overseas income (i.e., NZ IRD will not pay out tax refunds from another country).
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.