IRD eyeing cryptoassets: Tax implications for investors

Image: Cryptoassets

Come clean or expect Inland Revenue (IRD) to come calling.

For investors who are unaware of their tax obligations, this is the situation they face in the wake of the New Zealand tax department exercising its powers under the Tax Administration Act 1994 to request customer information from companies dealing with cryptoassets.

This appears to be part of a OECD initiative. The intergovernmental economic organisation recently released a comprehensive overview of the current tax treatment and tax policy gaps across the main taxes applicable to cryptoassets. This report looks at more than 50 jurisdictions, including all G20 and OECD nations.

IRD says it wants to help people get things right from the start.

It will not be surprising if investors receive a letter reminding them of their obligations and encouraging them to fess up if they have failed to disclose any income made from cryptoassets.

And investors would be wise to take heed of this correspondence.

After all, the information requested from cryptoasset companies includes customer blockchain wallet addresses and transactions until 31 March 2020.

It’s this type of data that may enable IRD to find other cryptoasset exchanges someone uses –  even if those exchanges are based overseas –  and compare the profile of cryptoasset investors against the position taken in their tax returns to see if there are any anomalies.

Don’t underestimate the department either. Its investigation staff are very effective at using this type of information to connect the dots. Just look at their work in the ‘Hidden Economy’.

What will be fascinating to see is just how much tax IRD is able to recover.

It has the potential to be quite a significant sum as the tax implications of cryptoassets do not appear to be widely understood by investors.

Tax treatment of cryptoassets

IRD treats cryptoassets as property for the purposes of tax, so normal income tax rules apply.

Its default view is that most people acquire cryptoassets with the intention of selling them. That’s because cryptoassets don’t pay interest and it’s only upon disposal that someone will realise a return on their investment.

This is very similar to its position on gold.

As such, in most cases, the profit an investor makes from disposing or exchanging cryptoassets is taxable.

To determine if tax is payable, IRD will look at the main purpose for acquiring cryptoassets at the time of acquisition.

Unless a person can provide clear and compelling evidence that shows they did not acquire cryptoassets with the intention of selling them, they must pay tax.

It does not matter how long someone plans to hold on to cryptoassets for before selling or exchanging them. A person’s main purpose can still be to sell or exchange them, even if it takes a several years for them to do so.

Cryptoasset income must be included as ‘other income’, business income or self-employed income in tax returns.

People must also keep accurate and complete cryptoasset records. They must hold these for at least seven years.

You can find more information on IRD’s website. It recently issued updated guidance on the tax treatment of cryptoassets.

This is a useful starting point and explains how it sees the rules applying for individuals and businesses. They even provide a few examples, too.

We strongly recommend you cast your eyes across this.

What to do now?

Investors would be wise to weigh up their next move now that IRD is looking further into cryptoassets.

The first thing to do is to speak to an accountant if you are unsure of your tax obligations. After all, this is a complex area and specialist advice should be sought.

In the event someone discovers they do have tax to pay on the profit they made from selling, trading, exchanging, mining or staking cryptoassets, they should consider making a voluntary disclosure.

The consequence of not disclosing taxable income can be brutal, with IRD charging shortfall penalties of up to 150 percent of the tax liability and usurious interest. The latter is currently seven percent, although has been much higher.

However, the truth shall set you free.

Making a voluntary disclosure can see shortfall penalties eliminated. Even if IRD has notified someone of an impending audit, there is still a possibility of a 40 percent reduction in shortfall penalties if someone comes clean before the investigation commences.

Reduce the interest cost with tax pooling

An IRD-approved tax pooling provider such as Tax Management NZ (TMNZ) can be used to reduce the interest cost significantly, if someone owes additional income tax due to failing to disclose the profit they made from their cryptoassets.

TMNZ lets someone apply tax that was paid to IRD on the original due date(s) against their liability.

As such, IRD treats it as if they paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties. Please note the legislation prohibits tax pooling from assisting with shortfall penalties.

For the current tax year (2021) or one just completed (2020), someone has up to 75 days past their terminal tax date for that tax year to pay the additional income tax they owe via TMNZ.

In the event a person receives a notice of reassessment from IRD due to an audit or voluntary disclosure, they can use TMNZ to reduce the interest cost on the difference between the original assessment amount and the reassessment amount.

We can assist with provisional and terminal tax, and other tax types such as GST, PAYE and FBT when there’s a reassessment.

Someone has up to 60 days from the date IRD issues the reassessment notice to pay the tax they owe via TMNZ.

Please contact us if you have any questions about tax pooling. We’re happy to help.