New Zealand’s Inland Revenue Department (IRD) has drawn comparisons between the gold bullion and cryptocurrencies. The IRD has stated that the process of buying and selling of both assets is similar in terms of tax collection purposes.
According to New Zealand’s tax authority, cryptocurrencies are not like fiat and “for tax purposes, cryptocurrency is property, not currency.” IRD’s stated reason for classifying cryptos as taxable property is because with digital assets, “foreign currency gains or loss provisions do not apply.”
Clear Guidelines On Crypto Taxes
The US Internal Revenue Service (IRS) has also classified cryptocurrencies as property, and both the IRD and the IRS have provided comprehensive guidelines on how to file taxes for crypto-related transactions.
Similar to capital gains on other asset classes, the IRD requires that the proceeds or profits generated from digital currency trading be reported as taxable income. Moreover, merchants who are paid in cryptocurrency for their products or services must include such transactions in their tax returns.
Accordign to the IRD, crypto assets are like gold because they:
generally don’t produce an income stream or provide any benefits, except when they’re sold or exchanged. This strongly suggests that cryptocurrencies are generally acquired with the purpose to sell or exchange them.
Diversified Long-Term Investments
However, the IRD acknowledges that some investors may acquire cryptocurrencies without the intention of selling or disposing them for capital gains. These people might be investing in crypto assets in the same way that many investors acquire gold bullion - to hold it and to diversify their long-term investment portfolio. So, if an investor is able to show that they will not realize an asset they’ve acquired, then the IRD might not consider such investments as taxable.
Furthermore, the IRD notes that it’s the investor’s responsibility to accurately file tax returns by documenting all taxable income, including that from cryptocurrency transactions. The tax authority also warns that not reporting crypto or any other type of transaction in the hope that it will go unnoticed is considered tax evasion.
Notably, New Zealand’s authorities began carefully addressing tax-related questions about digital assets when some of its citizens started receiving their salaries in cryptocurrency. The IRD felt that workers being paid in crypto could negatively affect tax revenue in a manner similar to the sale of digital services via the internet, because it can be difficult to collect a Goods and Services Tax (GST) on goods purchased through online retailers.
A more serious problem that the IRD and IRS are having to address is the increasingly global nature of many financial transactions, including cryptocurrency remittances which have the potential to make cross-border payments more difficult to track.