Cryptocurrencies – Are they on your radar?

Cryptocurrencies have been garnering worldwide attention recently, particularly with Bitcoin’s dramatic rise to over NZD$90,000 for a Bitcoin in April 2021, and its subsequent 50% crash through May and June.

Other cryptocurrencies, deemed ‘altcoins’, have also seen similar price volatility. These coins adopt the same principles as bitcoin, with slight changes and tweaks to differentiate them. ‘Dogecoin’, featuring a dog as its logo, saw a 12,000% increase this year, propelled by tweets from Tesla founder Elon Musk.

Clearly, some people are making large amounts of money in this space, and the Inland Revenue does not want to miss out on its share. Inland Revenue has released various forms of guidance on the topic of ‘crypto-assets’, which encompasses cryptocurrencies. Crypto-assets is defined as “cryptographically secured digital representations of value that can be transferred, stored or traded electronically.”

Effectively, cryptocurrencies provide a decentralised platform for transactions to take place. Each holder of the cryptocurrency has a ledger on their computer which updates as transactions take place. This network of ledgers is referred to as a ‘blockchain’. There is no one central entity, as the system relies on each ledger agreeing in order to verify transactions. This bodes well for security, as hacking the ledger on one computer will not affect the blockchain as a whole.

This process allows for cryptocurrencies to be used as an alternative form of currency, without the need for government monitoring or intervention. Bitcoin transactions are confirmed through a computationally intensive process called ‘mining’. Those who are willing to invest in the hardware to ‘mine’, are rewarded with bitcoins over time, adding to the overall supply of bitcoins. The supply of bitcoins is limited to 21 million, with 18.7 million currently in circulation. The last bitcoin is expected to be mined in 2140.

The tax guidance on crypto-assets is varied and somewhat contradictory. In general, crypto-assets are treated as a form of property for tax purposes. Individuals are liable for tax in the following circumstances:

  • acquiring crypto-assets for the purpose of disposal,
  • trading in crypto-assets, and
  • using crypto-assets for a profit-making scheme.

However, when salary, wages or bonuses are paid to an employee in the form of crypto-assets, PAYE applies. Furthermore, FBT may apply if employees are offered conditional crypto-asset payments by a company that issues crypto-assets. This leaves a situation where the IRD is treating crypto-assets as either property or currency depending on the situation. This is not surprising given the complexity and varied nature of crypto-assets; making an all encompassing treatment near impossible. For this reason, Inland Revenue is also proposing that the GST and financial arrangement rules do not apply to crypto-assets.

This year El Salvador made bitcoin legal tender, and we are seeing more stores accept cryptocurrency as payment. However, the extreme volatility associated with crypto-assets makes their use as a currency unreliable for the time being. Clearly, the market is not to be underestimated and we can expect further guidance from Inland Revenue as things evolve.