Cryptocurrency and tax

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Over the last decade, the use of digital or virtual currencies, known as cryptocurrencies, have grown in popularity.

Cryptocurrency is a medium of exchange, created and stored on the blockchain. Some refer to it as the ultimate digital currency that will gradually replace money. This is due to the fact that it is secure and unregulated by the banks as it is completely decentralised with no server or central authority.

Cryptocurrency is based on a cryptographic scheme that aims to provide security, privacy and trust in the currency by its holders. Common uses include trading, holding as a long-term investment, and increasingly as a means of payment by businesses willing to accept it.

Cryptocurrency has no intrinsic value or physical form, yet it is becoming extremely valuable. There are at least 37 virtual currencies in circulation, with the most popular being Bitcoin, where a single piece is valued at over $9000 NZD.

Bitcoin was announced in 2008 as a peer-to-peer electronic cash system to cut out the middle man and prevent double spending and has been credited to an unknown programmer, or group of programmers going by the pseudonym of Satoshi Nakamoto, leaving the real founder a ghost.

The first bitcoin was purchased in May 2010, when a developer used 10,000 bitcoin to pay for two pizzas ($41). In December 2017 this would have translated to $179,000,000.

Currently there are approximately 17 million bitcoins in circulation, with a finite number of 21 million set for circulation. It’s estimated the final bitcoin will be mined in 2140.

Many other cryptocurrencies have since been released. Unlike long existing virtual currencies, such as those found in online gaming communities which only have value within the community they are used, cryptocurrencies are convertible virtual currencies with equivalent real currency value.

The currency itself however is very volatile. In 2009 one bitcoin was worth $0.003. By December 2017 it was worth $17,900 and rising. The value then fell 2/3 of its value to $6000 two months later. This volatility is the reason some investors are weary and staying away. The volatility is due to the fact that the value is based on perception and not a bank or regulator, meaning the value can swing dramatically either way, causing either huge gains or substantial losses.

In 2017 PwC accepted its first payment in bitcoin, with this decision based on the premise of embracing new technology. While it is still too early to tell how wide cryptocurrency adoption will spread, some New Zealand retailers have already begun accepting bitcoin as a form of payment. Unsurprisingly, this has led to the Inland Revenue (IRD) considering the tax treatment of such currencies.

For tax purposes, cryptocurrency is treated as property, not currency. This means that the foreign currency gain or loss provisions do not apply. However, if a New Zealand business accepts cryptocurrency as a form of payment, the amount is treated as taxable business income. IRD see this as a barter transaction and due to volatility, will require the business to calculate the value of the cryptocurrency in NZD at the time it is received. Cryptocurrency merchant processors are able to perform this function instantly. Where this function is unavailable, the amount is converted using a reputable exchange rate to the NZD equivalent at the relevant date. This may require converting the cryptocurrency into another foreign currency, such as US dollars, to then convert into NZD.

Any gain on sale of cryptocurrency is assessed by considering the original purpose for acquiring the currency. As cryptocurrency is considered property, if the currency was acquired with the purpose of disposal, any proceeds made from selling the currency are taxable.

The IRD consider that due to the nature of cryptocurrency, it is unlikely that a person would acquire it without the intention to sell or exchange it. This means that the majority of gains made on disposals would give rise to a tax liability. This is due to that fact that cryptocurrencies generally do not produce an income stream or provide benefits to the holder, except when they are sold or exchanged. Furthermore, any gains or losses must be recorded at the time they occur, and not merely accounted for once the currency has been cashed out.

As IRD is still considering the tax treatment of cryptocurrency, they have provided guidance by advising the treatment to be similar to that of gold bullions, whose proceeds on sale are considered income.

This area is likely to continue to grow and more guidance is likely to be released, further to the questions and answers Inland Revenue released in March 2018. If you invest or trade in cryptocurrencies, be sure to keep an eye out on the Inland Revenue’s further developments, as they intend to refine tax treatment as more information becomes available.

The comments in this article are of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.

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Tracey Clark

Tracey Clark is a PwC director based in the Waikato office. Email: tracey.e.clark@nz.pwc.com