Crypto Tax Obligations in New Zealand: What You Need to Know

The Evolving Landscape of Crypto Tax in NZ

Cryptocurrencies have transformed dramatically since their internet debut in 2009. From an experimental digital currency operating in regulatory shadows to a mainstream financial asset class featuring over 25,000 different tokens by 2023, the evolution has been remarkable. Despite experiencing significant market volatility in 2022, cryptocurrencies have shown resilience with a strong recovery in 2024.

For NZ taxpayers holding crypto, recent tax developments from Inland Revenue signal that now is the perfect time to ensure your affairs are in order. Let’s explore these tax developments and what they mean for crypto holders in NZ.

Understanding NZ Crypto Basics for Tax Purposes

Before diving into recent changes, it’s important to understand how cryptoassets are defined and taxed in New Zealand:

• What are cryptoassets? Cryptoassets (also called crypto tokens, cryptocurrencies, or virtual currencies) are digitally secured representations of value that can be transferred, stored, or traded electronically using technologies like blockchain.
• Tax implications: Generally, when you sell, trade, or exchange cryptoassets, these transactions are taxable upon realization. This means if you purchase a cryptoasset and later sell it, the proceeds are taxable, with a deduction allowed for your initial purchase cost.
• Important distinction: A “sale” doesn’t necessarily mean converting to regular currency (like NZD) – exchanging one cryptoasset for another is also considered a taxable event.
• Global reach: For New Zealand tax residents, this includes cryptoassets acquired or disposed of overseas, including those on international exchanges.

All taxable income from cryptoasset activities must be included in your annual income tax return, regardless of where the transaction occurred.

Inland Revenue’s New Focus on Cryptoasset Compliance

In July 2024, Inland Revenue announced a significant shift in focus toward investigating taxpayers who fail to declare income from cryptoasset transactions. This represents a clear warning to the market.

Key Points About This Enforcement Change:

• Increased scrutiny: IRD has secured $116 million in additional funding over the next four years specifically for its NZ tax compliance activities, with crypto identified as a focus area.
• Advanced detection: Despite the common misconception that blockchain transactions are anonymous, Inland Revenue has developed sophisticated tools and analytical capabilities to identify cryptoasset activities.
• Final warning approach: The Commissioner of Inland Revenue has stated they will progressively contact crypto traders to inform them about the information already in Inland Revenue’s possession, offering a final opportunity to report undeclared income.

The scale of this issue is significant. Inland Revenue’s systems have already identified:

• 227,000 New Zealanders holding cryptoassets
• 7 million transactions
• A combined value of $7.8 billion

These figures likely represent only a portion of all cryptoasset activity, and Inland Revenue’s capabilities are expanding.

The Crypto-Asset Reporting Framework (CARF): A Global Approach

As part of Budget 2024, Inland Revenue received funding to implement the Crypto-Asset Reporting Framework (CARF), an OECD initiative designed to enhance visibility into cryptoasset transactions across international borders.

How CARF Will Work:

• Information exchange: CARF establishes a system where jurisdictions share information about cryptoasset activity, creating a global minimum standard that all OECD countries must implement.
• Widespread adoption: As of May 2024, fifty jurisdictions have signed up for this framework.
• Reporting requirements: Crypto intermediaries (like exchanges) will be required to provide tax authorities with detailed information about their users, including:
  • Personal details (name, address, date of birth, tax ID)
  • Transaction data covering crypto-to-crypto exchanges
  • Fiat conversions
  • Transfers to external wallets
• Timeline: CARF will likely apply from the 2026/27 tax year, with the first information exchange occurring in 2027.
• Revenue impact: The framework is expected to generate additional tax revenue of approximately $50 million annually from 2027/28 onward.

Potential Changes to NZ Crypto Tax Rules

There are hints of more changes on the horizon. The Regulatory Impact Statement suggests Inland Revenue may consider pre-populating income tax returns with cryptoasset income in the future. This could be paired with legislative changes to simplify how cryptoassets are taxed.

For taxpayers, this means not only increased enforcement under current rules but potentially a different tax treatment for cryptoassets in the coming years.

Tax Implications for NZ Crypto Holders

These developments have significant implications for anyone in NZ who holds or trades cryptoassets:

1. Proactive compliance is essential. With IRD actively investigating cryptoasset transactions, ensuring your tax affairs are in order should be a priority.
2. Increased transparency. The era of cryptoasset transactions flying under the radar is ending. International cooperation through CARF will create unprecedented visibility into crypto transactions.
3. Documentation importance. Keeping detailed records of all cryptoasset transactions, including dates, amounts, and values in NZD at the time of transaction, is crucial for accurate tax reporting.
4. Seek professional advice: The tax treatment of cryptoassets can be complex, particularly for frequent traders or those involved with newer products like DeFi or NFTs. Professional guidance may be valuable in ensuring compliance.

Taking Action: Next Steps for Crypto Holders

If you hold cryptoassets, now is the time to ensure your tax affairs are in order:

1. Review past transactions: Consider all cryptoasset activities and ensure they’ve been properly reported in past tax returns.
2. Consider voluntary disclosure: If you’ve failed to report cryptoasset income in the past, a voluntary disclosure before being contacted by Inland Revenue can significantly reduce potential penalties.
3. Implement proper record-keeping: Establish a system to track all future cryptoasset transactions in detail.
4. Stay informed: Tax treatment of cryptoassets continues to evolve; keeping up with changes will help ensure ongoing compliance.

Conclusion: The Changing Reality of Crypto Tax in NZ

The message from Inland Revenue is clear: the tax-free days of cryptocurrency are over. With enhanced tools, international cooperation through CARF, and additional compliance funding, tax authorities are well-equipped to identify unreported cryptoasset income.

For New Zealand taxpayers, these developments represent both a warning and an opportunity. Those who take action now to ensure compliance can avoid potentially significant penalties and interest charges that might come from future enforcement actions.

The crypto landscape continues to evolve rapidly, and so too does its tax treatment in NZ. Staying informed and compliant is the best strategy for cryptoasset holders in this changing environment.

Learn more about Inland Revenue’s other tax compliance focuses in our article: IRD Compliance Crackdown: What NZ Businesses Need to Know

If you have questions about your crypto tax obligations, Business Like NZ Ltd can be engaged as you tax professional. Contact us here.