Demystifying Cryptocurrency
Jun 16, 2022
With 18% of Kiwis using cryptocurrencies (aka cryptoassets, crypto, cyber cash, digital cash, virtual currency) it is important to understand what they are, how they are used and how they are treated from a tax perspective.
Cryptocurrency is the collective noun for the nearly 20,000 different currencies, (Bitcoin, Ethereum, Cardano, Litecoin etc) that use blockchain technology to provide a way to trade securely. This technology maintains a tamper-resistant record of transactions and keeps track of who owns what. Individual units of cryptocurrencies are known as coins or tokens, depending on how they are used. As of 13 June 2022, the cryptocurrency market was valued at US$970m, having dropped from US$2.9t in late 2021. It is worth noting that Non-fungible Tokens (NFTs) are not cryptocurrency but are similar in that they can be bought and sold in the same market places.
Cryptocurrencies can be used in three main ways:
Most people buy cryptocurrency from another user or a trader, but it is also possible to mine for it, creating new currency. Mining involves solving complex puzzles that seek to verify the authenticity of transactions. These complex puzzles require a lot of computing power (energy, electricity) and this is where concerns about the environmental impact originate.
Cryptocurrency appeals to those ‘early adopters’ who see it as a transformational technology. It is also attractive to those who dislike centralised money suppliers such as wholesale and retail banks. Whether it is a fad or the way of the future, Inland Revenue treats cryptocurrencies as a form of property for tax purposes. While they may not be subject to GST when traded, there are GST implications if they are used as payment for normal business activities. If your business accepts cryptocurrencies as payment, you may need to pay tax on them. If you provide cryptocurrencies to your employees, PAYE and FBT rules apply and potentially employee share scheme rules as well.
In contrast with established, highly regulated trading markets, the crypto market is subject to unpredictable and volatile fluctuations, with many governments still figuring out how to handle these currencies. For these reasons, we recommend talking with your accountant to understand the impact on your tax obligations, prior to entering the market or offering cryptocurrency as a form of payment or compensation for your customers or staff.
