ACCA (the Association of Chartered Certified Accountants) has issued a new warning to professional accountants over the importance of maintaining an up-to-date understanding of developments in the fast-moving space of cryptocurrencies like Bitcoin.
Bitcoin experienced explosive growth in value towards the end of 2017, followed by a quick and large loss of value (almost two thirds) in the early part of 2018, and this naturally raises questions of how revenue authorities should be taxing cryptocurrencies generally.
Inland Revenue has a piece of advice for those dealing with cryptocurrency, pending it releasing specific guidance on how their incomes should be taxed.
It says people should treat money made buying and selling cryptocurrencies in the same, or similar, way they would money made buying and selling gold.
That is, pay tax on the profit made by selling a currency, only if that currency was bought with the intention of resale.
So if you buy units in a currency for $1000 and resell them for $1800, you’d pay tax on that $800 profit.
Yet if you could only resell your units for $600, your $400 loss would be tax deductible. Other expenses may also be tax deductible.
The IRD has said this comparison to gold “may be useful when considering the income tax treatment of cryptocurrencies”.
Yet: “If any customers need further guidance, we can discuss their particular circumstances.”
The information sheet on gold, the IRD has pointed to, explains: “As with any personal property, amounts derived on the disposal of gold will be income under s CB 4 if the gold was acquired for the dominant purpose of disposal…
“Ascertaining what a person’s subjective purpose was at the time they acquired property is a very fact-specific assessment."
“The particular circumstances of the situation need to be carefully considered, and any assertion that gold was not acquired for the dominant purpose of disposal would need to be supported by clear and compelling evidence…"
“Describing property as being acquired as a long-term investment, a hedge against inflation, for portfolio diversification, or as a store of value outside the monetary system is not sufficient to negate a dominant purpose of disposal.”
The info sheet makes no mention of GST.
The IRD says: “Preparatory work is underway on issuing public guidance regarding the tax treatment of cryptocurrencies.”
However it can’t say when this guidance will be completed and what it might look like.
Nor can it comment on the extent to which it is actually enforcing its tax advice in the interim - none of which has even been put on its website.
Challenges and opportunities
Auckland University’s Commercial Law Head of Department, Alex Sim, says she has been approached by a number of people from overseas, curious as to why a technologically advanced country like New Zealand doesn’t have guidance on taxing cryptocurrencies.
She believes there might be a natural reluctance from the Government to be seen to be endorsing cryptocurrencies, due to all risks posed by trading them.
Yet she’s concerned authorities’ silence on the matter is only forcing investors to move overseas, where they are even less protected.
Sims recognises that taxing income derived from cryptocurrencies will have its challenges.
It might be difficult to keep a record of a large numbers of small trades for example. And trying to ascertain whether investors - early adopters in particular - bought currencies with the intention of resale can be complex.
Sims also recognises there will be people who will deliberately try to game the system, but believes this isn’t a reason to not have a system at all.
She isn't sure how much taxable income New Zealand traders would have made to date, as a number of people would've made gains on paper, but wouldn't have sold up and cashed these in.
What other tax authorities are doing
Deloitte tax partner, Ian Fay, has written a piece explaining how other countries are also grappling with how to tax cryptocurrencies.
He says: “In the United States, the IRS has released guidance that cryptocurrency is property when held on capital account, and gains are subject to capital gains tax. Miners of currency should pay tax on the value of the currency they receive.
“Similarly, both the UK and Australia tax gains from the sale of cryptocurrencies under their capital gains tax rules.
“In terms of GST, buying cryptocurrencies and then using them to buy other goods and services could result in double tax. The purchase of the unit of cryptocurrency would be subject to GST, and then any subsequent purchase with the cryptocurrency would also be subject to GST.
“Deeming cryptocurrencies to be currency for GST purposes would remove GST from the sale or purchase of any units, solving the double tax problem.
“Australia is moving to treat cryptocurrencies like a currency for GST purposes (from 1 July 2017) for this reason.”
Source: Tibshraeny, J. (2018, January 11) The IRD says people should consider money made selling cryptocurrencies - bought with the intention of resale - as taxable, until it releases specific guidance on the matter [Blog Post] retrieved from: https://www.interest.co.nz/personal-finance/91564/ird-says-people-should-consider-money-made-selling-cryptocurrencies-bought