Cryptocurrency End of Year Tax Guide
The end of the financial year is here, and this update provides an overview of:
1. Tax Summary for Cryptocurrency
2. Crypto End of Year Checklist
3. How AgBiz Accountants can help
If you have any questions, please don’t hesitate to get in touch
Tax Summary for Cryptocurrency
IRD default position is that if you acquired cryptocurrency for the purpose of disposal, gains or losses will be taxable. We’ve previously outlined IRD reasoning for this in our original article (recommended reading) here, and also for miners here. There may be certain situations where IRD default position does not apply and examples of these may be acquiring coins for master nodes (and therefore earning a return), or acquiring certain security or debt coins (and therefore having an equity position).
The justification is on the taxpayer to prove their tax position. A specific coins characteristics provide no justification for the owners original intention. For example, if you purchase a security or debt coin, it doesn’t default to a non-taxable position; you need evidence to support your position (transaction history etc). Furthermore, you can still trade security and debt coins to make profit which is taxable.
Gains and losses are recognised (taxable event) when a coin is disposed of. This includes a trade, as you have disposed of your original coin. For example, if you trade BTC to ETH you no longer have BTC and the gains or losses on BTC will become taxable. Every trade needs to be analysed to determine the taxable profit or loss for the year.
There is no tax on unrealised gains or losses (in most situations). For example, if you purchased a coin for $1 and its price is now $2, the $1 profit you are currently holding is not taxable until you dispose of the coin. If you are currently holding a loss (for example cost of $5, being greater than market value, say $2), if you were to dispose the coin, the loss of $3 would become realised, as you no longer own the original coin. The $3 loss may be able to be offset against profits from other trades, or other income from outside crypto.
Cryptocurrency is recorded as ‘trading stock’ (for traders who are in business) and IRD accept that closing stock can be recorded at the lower of cost or net realisable value. If a coin’s market value at 31 March 2018 (reliably measured through a reputable exchange), is lower than your cost price, there may be justification to record your closing stock at their market value. Therefore you may not necessary need to dispose of the coins to recognise a write down in value. If you are not in business, this business concession may not apply to you.
End of Year Checklist
- Record your inventory (stock take) of all your coins at 31 March 2018. This could be screen shots of coins held on exchanges (try to include your account name/ID), or a screen shot of your public wallet addresses with the coins and quantity held. We understand that with digital assets it may be difficult to prove ownership and quantity held at a certain date and time, but it is a fundamental part of the accounting and tax process. This is no different from a normal business doing a stock take.
- Record and write off any coins that are not going to be recovered. This could potentially include hacked exchanges, funds lost in crumbled crypto Ponzi schemes, or small balances of coins left on exchanges that are unable to be transferred or used.
- Download CSV files and transaction history of all trades on all exchanges used. This captures the audit trail of information needed to determine your total sales, total purchases, and closing stock. Every trade can be analysed to calculate profit.
- Download any bank statements that include deposits or withdrawals of cryptocurrency. These may include NZD bank accounts, and also foreign currency (FX) bank accounts (if applicable). FX bank accounts are generally taxed under the financial arrangement rules.
- Calculate your tax liability early. If your residual income tax (RIT - tax on total income) is more than $60k, you should have already paid a third of your 2018 tax bill in August 2017, another third in January 2018 and the final third in May 2018. If you have not paid any tax yet, your tax liability will be incurring IRD use of money interest (UOMI) at 8.22%.
- Record this information and keep it safe for seven years (should IRD ask)
How we can help
We are Chartered Accountants who prepare financial statements and income tax returns that involve cryptocurrency. This includes speculators, traders, miners, futures traders, or those that provide a service using crypto (exchanges, joint investments, brokering). We have already filed many 2017 tax returns with IRD for cryptocurrency clients.
We take your exchange trading records, prepare your financial statements, calculate your taxable income and file your tax return with IRD. Financial statements prepared by Chartered Accountants may assist in providing information to your bank that support deposits of crypto to your bank account (this may assist with the banks Anti Money Laundering Act requirements).
We determine your tax liability, monitor your tax payments (including 2019 provisional tax payments) and can manage all correspondence with IRD on your behalf. We prepare an individualised tax strategy that can provide certainty to your future tax payments (amounts and due dates). This is regularly updated depending on your trading activity, intentions and changing market conditions.
If you have other businesses (including companies or trusts) we can assess your total group position. This will be highly individualised depending on the nature of your other entities.
If you have not paid any tax on 2018 profits yet and IRD interest will be charged (RIT >$60k), we can save 30% on IRD interest charged by utilising tax pooling. We save you money through buying back dated tax (when it was previously due to be paid), at a cheaper price than the interest charged by IRD.
Contact Tim Doyle (firstname.lastname@example.org) for a no obligation call or meeting to discuss any crypto tax or accounting questions. Our office is in Cambridge, NZ, but distance is no problem. We have many international and national clients.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.