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Investing in cryptoassets? It’s time to think about your tax obligations

August 2024 - Tax Alert

By Joe Sothcott & Ian Fay

Cryptoassets, once the unregulated Wild West of currency, have come a long way since they first appeared on the internet in 2009. As of 2023, there were more than 25,000 cryptoassets in the marketplace. Despite a steep drop in values during 2022, the cryptoasset bounce-back in has continued into 2024.

Two recent developments serve as a reminder to taxpayers that if they have cryptoassets, they need to ensure they have their tax affairs in order – or, they may face an unpleasant surprise when Inland Revenue comes knocking.
Let’s take a quick refresher on these tax rules before diving into the latest developments.

Cryptoassets 101

Cryptoassets, also known as crypto token, cryptocurrencies, virtual currency and a number of other ‘crypto' terms, are cryptographically secured digital representations of value that can be transferred, stored or traded electronically, and utilise distributed ledger technologies such as blockchain.

Generally, selling, trading, or exchanging cryptoassets is taxable on realisation. This means that if a person buys a cryptoasset, the amount received upon selling the cryptoasset is taxable with a deduction allowed for the purchase cost of the asset. A sale may be for fiat currency (i.e., Government-issued currency such as NZD) or the sale proceeds may be used to purchase another cryptoasset. However, this is only a rule of thumb and specific tax rules may apply depending on the circumstances.

When there is taxable income from a cryptoasset activity, it must be included in your income tax return. For New Zealand tax residents, this includes cryptoassets acquired or disposed of overseas — for example, using a non-New Zealand-based crypto exchange.

Development #1: Inland Revenue’s pivot to cryptoassets

In early July 2024, Inland Revenue announced a new investigation focus on taxpayers who are not declaring income from cryptoassets in their tax returns. Inland Revenue warned that, contrary to popular belief, people are not invisible on the blockchain, and Inland Revenue has the tools and analytic capabilities to identify cryptoasset activities.

In light of Inland Revenue’s additional funding for compliance activities ($116 million over the next four years) allocated in Budget 2024, taxpayers should anticipate a ramp-up in questions and information requests. The Commissioner of Inland Revenue has confirmed reducing systemic risks in areas such as cryptoassets will be part of the increased compliance activity. The Commissioner also said Inland Revenue will be progressively approaching crypto traders to let them know about the information Inland Revenue has and give them a final chance to report their income. In other words... no more Mr Nice Guy!

Inland Revenue’s computer system has already identified 227,000 New Zealanders holding cryptoassets who undertook 7 million transactions with a value of $7.8 billion. But this may only be the tip of the iceberg with the amount of data Inland Revenue has available set to increase with a second cryptoasset-related development...

Development #2: Crypto-Asset Reporting Framework

As part of Budget 2024, Inland Revenue received additional funding to develop a Crypto-Asset Reporting Framework (CARF). The Regulatory Impact Statement (RIS) notes that, due to the decentralised nature of cryptoassets and limited regulation, tax authorities have limited visibility about income derived from cryptoassets. While Inland Revenue may have the tools to identify some cryptoasset activities, a statutory tax reporting regime would be more comprehensive and provide data that is easier to police.

Enter the CARF. CARF is an OECD initiative we first discussed in our November 2022 Tax Alert. The idea is for international jurisdictions to exchange information about cryptoasset activity. The framework is intended to be a quid pro quo information exchange. The CARF will be a global minimum standard, meaning all OECD countries will be required to implement it. As of May 2024, fifty jurisdictions have signed up.

So, how will it work? CARF will require crypto intermediaries to provide tax authorities with information about users on their crypto platform. The information will then be automatically exchanged with other CARF jurisdictions. Information collected and provided by the intermediaries will include personal information (i.e., name, address, date of birth, and tax identification number) as well as user and aggregate level data on relevant cryptoasset transactions.

The aggregate level data includes crypto-to-crypto transactions, crypto-to-fiat transactions, and transfers of relevant cryptoassets (such as to a unique identifier in the blockchain “a wallet address”) broken down by the relevant cryptoasset. CARF will also include valuation and currency translation rules. For example, the amount paid or received must be reported to CARF in the fiat currency in which it was reported or received.

CARF will potentially apply from the 2026/27 tax year. The first information exchange relating to 2026 data will take place in 2027. Additional tax revenue is estimated at $50 million per annum from 2027/28 onwards.

The RIS highlights that Inland Revenue may consider pre-populating income tax returns with cryptoasset income and that this could be easier if tax changes were made to simplify how tax is calculated on cryptoassets. This means that there could be legislative changes to how cryptoassets are taxed; watch this space.

If you have any questions regarding tax obligations on cryptoassets, please contact your usual Deloitte advisor.

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