(cryptobusiness tax – 3 minute read)
Hi there accounting fans!
In our last article, we talked about how cryptoasset income is determined for individual tax payers.
In today’s article we are going to talk about tax for cryptobusinesses – that is businesses that buy/sell/trade/are paid in cryptoassets.
What is a cryptobusiness?
A cryptobusiness , or cryptoasset business (which is the proper term for it) is a business that carries out one or more of the following activities:
- Cryptoasset mining
- Cryptoasset trading
- Maintain a crypto exchange business
Of course you could do all of the following and still not be a business, so how does the IRD determine if you are running a business or not?
Cryptobusiness tax – Are you running a cryptoasset mining business?
Cryptominers range from single rig hobbyists to full blown energy guzzling multiple rig setups. If you are running mining activities, you need to pay taxes on:
- Mining rewards when you receive them
- Profits from selling your mining rewards
You are running a ‘cryptoasset mining business’ if you’re mining cryptoasset regularly to make a profit. There are a few things that the IRD looks at in determining if you are running a business.
How long have you been mining?
Did you just start mining for 2 months this financial year? Or have you been mining consistently for the past 20 months? Intention is everything and if you’ve invested heavily in mining rigs, you are likely to be classified as a cryptoasset mining business. These are the things that get scrutinised if you try to pass off your operations as a ‘hobby’:
The size of your operation
If you have a warehouse full of crypto mining rigs, you’re not going to be able to get away with calling yourself a hobbyist. The number of transactions you engage in also determines how big your operation is
Time and effort put into mining
If you are working 20 hours or more, that is pretty much full time work. If you’ve invested a significant amount of money (mining rigs aren’t cheap!) you are going to be seen as running a business as well.
The pattern of your mining
Is it regular, do you only do it once a year? The more frequent your mining activities are, the more likely you will be classified as a business.
Income, profit and nature of your mining activity
If you have set up the mining operations with an intention to make profit and you are turning a profit – you’re running a mining business.
Cryptobusiness tax – are you in the business of trading in cryptoassets?
Trading and selling cryptoassets as a business is not too different from doing it as an individual. In fact, being a trading business is better because you get to claim operating expenses against your trading income.
You are deemed to be running a cryptoasset trading business if you:
- Have an organised and systematic trading activity
- Have a high number of transactions
- Work on your trading activity on a fairly continuous basis
This also means that your cryptoassets are treated as trading stock. What this means is that your cost of sales is derived from your opening balance of cryptoassets at the start of the financial year, PLUS any cryptoasset purchases and minus your closing balance of cryptoassets.
But I only do trading part-time?
Well, if you are trading part-time, and you have a full-time job, you’re probably not a trader. Unless of course you are building up your side hustle towards full-time crypto trading.
Either way, you are going to get taxed on the gains you make. So it’s better to be running a business since you can claim operating expenses. Get those trading systems up and running to prove that you’re running a business!
I hold some cryptoassets personally, not as part of the business. What about them?
Weeeeelllll.
You can try and make that argument but it may be hard to prove that they are for personal use. You will need clear and compelling evidence to show that thery were not part of your trading business when you bought/sold them.
But again, it’s still better to declare them as part of the business since you can claim operating expenses against any gains made.
You still ARE paying taxes on any gains made on their sale as an individual ANYWAY.
What expenses can be claimed for cryptobusiness tax?
Well, the acquisition of new cryptoassets are deemed to be tax deductible purchases since they become your trading stock.
Apart from that, the usual operating expenses of running a regular business apply. This can include wages, rent, utilities, home office expenses, motor vehicle expenses, etc etc.
There are also some cryptobusiness specific things you can claim as well, like:
- Depreciation on your mining rigs
- Transaction fees on buying/selling crypto
- Subscription fees to crypto trackers/software/platforms
And I’m sure there are a few other things you can think of that relate to running a cryptobusiness.
Getting paid and/or paying in crypto for cryptobusiness tax
Ok, so you’ve decided to forgo cold hard cash in exchange for some digital currency. Can’t say I agree with you, but I’m not here to judge your choices.
If you are using crypto as a form of exchange, you’ll need to work out the NZD value of the cryptoasset being used in the transaction at the time they are used.
This means that if you are getting paid in crypto, it’ll be considered as NZD income and you will get taxed on it.
This also applies to paying your employees in cryptocurrency. And I think this also needs emphasising in all caps:
YOU NEED TO PAY YOUR STAFF THE NZD MINIMUM WAGE EQUIVALENT IN CRYPTOASSETS (if paying them in cryptoassets).
So you can’t pay them in some dirt cheap coins and tell them that it’ll appreciate. You still need to meet your employment obligations and work out the PAYE you need to deduct on the cryptoasset payments being made. We’ll cover this more in the next article on calculating cryptoasset tax.
Cryptobusiness tax on selling crypto you’ve received.
So we’ve established that receiving crypto as income results in you getting taxed right?
But when you on-sell this same crypto for gain, you can claim a deduction for cost equal to the value of the cryptoassets when you got them. This is the same value you paid tax on when you received the cryptoassets. This way you don’t get taxed twice. But if the cryptoasset has gone up in value since you first received them as income, there will still be a taxable gain on the transaction.
What about paying tax in cryptoasset income?
That my dear reader is another article all on its own, which we shall discuss next time!
In the meantime,
Stay positive!