Crypto assets: tax treatment and emerging compliance focus
Clients who hold or transact in crypto assets should be aware that tax authorities are increasing their scrutiny of cryptocurrency activity.
Information relating to crypto transactions is now being shared between tax authorities internationally, meaning investment activity conducted through overseas platforms may still be visible to domestic regulators.
This increased transparency means investors should ensure their crypto holdings and transactions are correctly reported for tax purposes.
While some investors have historically assumed that gains or losses from cryptocurrency are difficult for authorities to track, the global exchange of tax data is making this assumption increasingly unreliable.
Market conditions over the past 12 months have also been volatile, with the value of many crypto assets declining. For investors who have realised losses by selling their holdings, it may be possible that these losses are tax deductible, depending on the purpose for which the assets were originally acquired and how they were used.
Each situation must be assessed individually, as tax outcomes can vary depending on whether the crypto assets were held on revenue account, used in trading activity, or acquired for investment purposes.
DeFi activities may trigger taxable events
Another area receiving greater regulatory clarification is the tax treatment of decentralised finance (DeFi) activities such as liquidity pools and staking.
Transferring crypto assets into a liquidity pool – where they are combined with other users’ assets and utilised by the protocol – may be treated as a disposal for tax purposes.
Similarly, transferring assets into staking arrangements can also be considered a disposal if the holder no longer has direct control over those assets.
Regulators are increasingly looking beyond the technical terminology used in the crypto sector and instead focusing on the underlying legal and economic substance of the transaction. This approach is intended to determine when a taxable event has occurred under tax law, regardless of how the activity is described within the crypto ecosystem.
If you hold or transact in crypto assets, it is worth reviewing your records and tax reporting to ensure everything is captured correctly. Speak with Alliott NZ in Newmarket Auckland for assistance reviewing your crypto activity before lodging your next tax return.
Related reading
New Zealand Inland Revenue treats crypto assets as property for tax purposes and applies ordinary income tax rules, meaning profits from selling, trading or exchanging crypto assets may be taxable depending on the taxpayer’s purpose when acquiring them. Read more https://www.ird.govt.nz/cryptoassets
