(3 minute read – cryptocurrency tax)
Hi there accounting fans,
As promised last week, we’re back and we’re going to take a simple but concise look at cryptocurrency tax. Please note that advice contained in this article is specific to the NZ tax regime. Please check with your local tax office for their treatment of Cryptocurrency tax.
To kick off this article, let’s start with a very simple question:
What is Cryptocurrency tax?
Simply put, it is tax that you pay on cryptocurrency (referred to as ‘cryptoassets’ in accounting-ese) transactions.
Everytime you sell cryptoassets, you pay taxes on the gains you make. Everytime you receive cryptoassets as an income, you pay taxes on that income.
Crypoassets have quite suddenly burst onto the scene and tax authorities have had to quickly put together new rulings to prevent individuals from making untaxed income on these assets.
According to the IRD, the following can be defined as Cryptoassets:
- Cryptographic assets
- Digital financial assets
- Digital tokens
- Virtual currencies
So if you’re holding and/or planning to sell any of the above assets or receiving them as income, you may be taxed on any cryptoasset income you make.
How is Cryptoasset income for individuals determined?
If you are holding as an individual, then any income made from Cryptoasset transactions are added to your income for the year (from ALL sources) and taxed at your personal tax rate.
To keep it simple, whenever you sell a cryptoasset and you make a gain on it, you pay taxes.
If you get paid in cryptoassets, you pay taxes on that as well. We’ll discuss how this is calculated in a later article.
Cryptocurrency tax on buying and selling cryptoassets
If you are buying or acquiring cryptoassets with the purpose of selling (diposing) them at a later date for the purpose of making a gain, this gain is considered taxable income. So long as there is an intention to dispose of the asset for a gain, the income received from the gain is taxable.
First of all, you need to determine the cost of acquiring the cryptoasset. You need to keep a record of this.
Second, you need to determine the price at which you sell the crypto asset off.
The cost of acquiring the asset is offset against the sale price of the asset. The gain that you make is considered taxable income.
Taran buys 10,000 units of MEMEKOIN on 15 October 2021 at $0.05 a piece. On 15 November 2021, he sells them all at $0.15 a piece. He makes a gain of $1,000 ($1,500 sales minus $500 cost of acquiring). This $1,000 is considered taxable income.
That is a simple example. Let’s look at a more complex situation:
Taran buys 10,000 units of MEMEKOIN on 15 October 2021 at $0.05 a piece. He buys another lot of 5,000 units of MEMEKOIN on 30 October 2021 at $0.10 a piece. On 15 November 2021, he sells 12,000 units of MEMEKOIN at $0.15 a piece.
In this situation, unless Taran knows the cost value of the specific units sold in the 15 November transaction, he has a choice of either using the First in First out (FIFO) or Weighted Average Cost (WAC) method of determining the cost of the sales, as the sales are made from two different batches of MEMEKOIN purchased on separate dates.
FIFO (First in First out) example
Under the FIFO method, cost of sales are assumed to be made from the first lot of purchases. In the example above, the first 10,000 units of the 12,000 units sold are said to be from the 15 October batch, which leaves ‘0’ units remaining in that batch (as they have been sold). The remaining 2,000 units comes from the 30 October batch, which leaves 3000 units remaining in that batch.
The cost of acquisition is $700 which is (10,000 units X $0.05) + (2,000 units X $0.10). Hence the gain made on sale is $1,100 ($1800 – $700).
WAC (Weighted Average Cost) example
Under the WAC method, the cost of each batch is averaged over each subsequent purchase. Hence in this example, we’ve worked out the average cost per unit to be $0.0667 before the sales on 15 November 2021. The cost of sales is $800 (12,000 units X 0.0667). Therefore the gain on sale is $1,000 ($1,800 minus $800).
Cryptocurrency tax on mining cryptoassets
Mining is the process of creating new blocks that are added to the blockchain ledger which are used to verify and achieve consensus on new blocks to the blockchain. Mining can be done with a solo mining rig, or as part of a mining pool. If you don’t understand any of this, don’t worry, you’re probably not a miner and you can skip this section.
If you are a miner, then there are some tax issues you need to consider:
Are you mining cryptoassets as a business/to make profit/ordinary income?
If you are making any income from mining, you will have to pay taxes on:
- Any mining rewards received
- Profits made on selling your mining rewards
If an individual is carrying out a mining operation, the IRD will tend to see it as a business. There are a few things that they look for, such as the duration of operations, how much you have invested into the operations and your intention of making a profit from mining.
The scale of operations doesn’t matter too much – so long as your intentions are to make money from mining operations, you are likely to be liable for tax.
If you are running your mining operations as a business, you can claim the usual business operating expenses against your income. But we’ll discuss this in greater detail in the second part of this series, Cryptocurrency tax for businesses.
But, I swear, my mining is just a hobby!
In some VERY limited situations, the IRD may consider your mining operations as ‘just a hobby’ and hence you won’t get taxed on income made from mining. However, the intentions of such an operation will be scrutinized and it is quite likely that you will still get taxed.
A ‘mining hobby’ is generally defined as ‘not engaging in the active pursuit of profit from the operations’. If you are infrequently mining or have derived some reward from a one-off mining activity, then you may classify your mining activity as a hobby.
Otherwise, you will have to pay taxes on it.
Cryptocurrency tax on airdrops and hard forks
Airdrops are new currencies given to crypoasset investors as rewards. Hard forks are new currencies created from the changes made to a protocol of an existing cryptoasset.
Either way, they are cryptoassets that you receive for free.
Unlike buying and selling cryptoassets, you can’t claim the cost of acquiring cryptoassets via airdrops or hard forks because you got them for free.
Unless you have a cryptoasset business, have provided services to obtain the airdrop or receive airdrops regularly as part of a profit making scheme, the receipt of airdropped cryptoassets is not taxable.
In most cases, the disposal of the airdropped cryptoassets will be taxable (as they are acquired for the intention of disposal). Some cryptoassets may be passively acquired and may not be acquired with the intention of disposal. But obviously, if you still dispose of them and make a gain doing so, you may be taxed on that gain.
Receipts of hard forks are taxable IF you have a cryptoasset business or acquired it as part of a profit making scheme (like the Airdrops above).
Disposing of cryptoassets acquired from hard forks are generally taxable. Even if you received the new cryptoasset from an exchange without doing anything. As long as you are disposing of the cryptoasset, you are going to pay taxes on it.
What more do I need to know about cryptocurrency tax on individuals?
In this first part we’ve looked at different scenarios where you can get taxed as an individual on cryptoasset income. Generally speaking, you can get taxed:
- On the receipt of cryptoassets from provision of services
- Gains made on disposal of crypto assets
Note that if you are running your crypto operations as a business, you can claim the usual operating costs of a business. If you are simply trading on the side, you can only claim the cost of acquiring said crypto assets.
In the next article, we’ll take a look at the tax implications of running a cryptoasset business before we finally crunch some hard numbers at look at how to calculate cryptoasset taxes.
Until then, stay informed and