Bitcoin and Cryptocurrencies – How to Tax?

Inland Revenue has recently given an update on its thinking on how Bitcoin and other cryptocurrencies should be dealt with from a tax perspective.

Inland Revenue considers cryptocurrencies as property, rather than currency or money. This means that the normal tax rules that apply to personal property also apply to cryptocurrency.

A person that deals in cryptocurrency or acquires cryptocurrency with a purpose of disposal is subject to tax on any profit realised. As cryptocurrencies only produce a benefit when the holder sells or exchanges them. Inland Revenue considers that a person will have acquired a cryptocurrency with the purpose to sell or exchange, even if held as an investment rather than for dealing purposes. Therefore, Inland Revenue considers the proceeds of selling or exchanging cryptocurrency as taxable income.

Inland Revenue considers mining cryptocurrencies an activity that a person undertakes with the purpose of making a profit. It is either a business or a profit-making scheme, meaning any payment or reward (such as a bitcoin) received from mining will be taxable income. Of course, the person can claim a deduction for any expenses incurred in mining cryptocurrencies, such as depreciation on the computer used.

When a business receives cryptocurrency in payment for goods and services the business must find the value of the cryptocurrency in New Zealand dollars (NZD) at the time the business received it. If the exchange does not provide a NZD value for the cryptocurrency at the time of receipt, the business must use a conversion rate from a reputable exchange to convert the cryptocurrency to NZD. If no conversion rate to NZD is available, the business must convert the cryptocurrency to US dollars and the US dollars to NZD.

Because cryptocurrency is not money its supply will be subject to GST when made in the course or furtherance of a taxable activity. Mining cryptocurrency will generally be a taxable activity. Whether investing or dealing in cryptocurrency is a taxable activity will depend on the continuity or regularity of the activity involved. A registered person must account for GST on goods and services paid for with cryptocurrency as with any other supply.