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Cryptocurrency - eyes wide open



Cryptocurrencies are digital currencies that can be used in place of money. Bitcoin, perhaps the most widely known cryptocurrency, was released in January 2009 and burst into mainstream media in 2017 when its price increased almost twentyfold over the year. Since its December 2017 peak, Bitcoin has lost around two-thirds of its value and also lost media appeal. So was Bitcoin just a short-lived fad or is there real value in it or other cryptocurrencies? And, if you happen to own some cryptocurrency, how is it treated in NZ for tax purposes?


Future of cryptocurrencies. Although there are plenty of divergent views on this, a panel of experts at the PwC Herald Talks Business meeting in Christchurch earlier in the year agreed that whoever develops a cheap, easy, and trusted cryptocurrency will provide the future of money. We'll have to wait and see if one or two major payment systems come to dominate the market or whether consumers do not care what cryptocurrency they use as long as it is instant and secure. Either way, it seems there is a place for cryptocurrencies and they are going to be around for a while.


The key technology underlying many cryptocurrencies - the Blockchain - presents great opportunities in other applications. The Blockchain is like an incorruptible, transparent, secure record of information. And that information can be anything. Blockchain technology may transform our lives as much as the internet or the smart phone. Possible uses include government procurement, secure online voting, land ownership registers, contract recording, passports and identity verification. The Blockchain, by making knowledge accessible, can help relieve poverty and reduce corruption. Pretty heady stuff.


Taxation of cryptocurrencies. To date IRD have been disturbingly quiet on how cryptocurrencies are taxed, publishing only limited guidance recently in the form of short questions and answers (http://www.ird.govt.nz/income-tax-individual/cryptocurrency-qa.html). First up, IRD say cryptocurrencies are property, not currencies. While this might sound contradictory, it means foreign exchange gain and loss rules are not applied. If you accept cryptocurrency as payment for goods or services it is treated as a barter transaction and you are taxed accordingly. If you mine cryptocurrency, the value of the cryptocurrency you receive is taxable (you can offset relevant expenses, as usual).


Less clear is the taxation when you have been holding cryptocurrency and eventually dispose of it. IRD state that, in general, cryptocurrencies are acquired with the purpose to sell or exchange so the proceeds would be taxable. However, IRD also acknowledge that holding cryptocurrency can be likened to holding gold bullion and, in some circumstances, a gain might not be taxable.


IRD are currently silent on the GST implications. Some commentators are of the view that purchasing cryptocurrency is subject to GST and subject to GST again where cryptocurrency is used to pay for goods or services, i.e. a double GST cost. Australia has moved to treat cryptocurrency as a currency for GST purposes, solving this double tax problem. It is likely IRD will do something similar and treat cryptocurrency as property for income tax purposes but as currency for GST purposes.


As you can see, things are not clear and the area is evolving. If you have any questions regarding your cryptocurrency transactions please contact us.

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