The rise of cryptocurrencies has brought about various investment opportunities and innovative ways to earn returns. One such method is staking, which involves holding crypto assets in a digital wallet to support the operations of a blockchain network and earning rewards in return. While staking can be lucrative, it is essential for participants to understand the tax implications associated with this activity.
In New Zealand, we consider that crypto assets used for staking should be subject to the financial arrangement regime, which affects the taxation of gains and losses.
In simple terms, staking refers to holding and locking up a certain amount of cryptocurrency in a digital wallet to support the operations and security of a blockchain network. By staking their crypto assets, individuals participate in the network's consensus mechanism and help validate transactions or create new blocks, depending on the specific blockchain.
Think of staking as holding a company bond or a term deposit. When you stake your crypto, you're essentially locking it up for a specific period to support the network and perform certain tasks. In return for your contribution, you receive rewards or interest, typically in the form of additional cryptocurrency. Like a bond’s principal, the value of the crypto can fluctuate over time and it is this fluctuation that the financial arrangement rules seek to address.
Under the financial arrangement regime, the gains and losses on the value of crypto assets used for staking are treated as assessable income. However, the timing of when these gains and losses are recognised depends on the circumstances.
Alternatively, gains and losses on staked crypto assets can be taxed on a realised basis. This occurs either when the assets are sold or when they are removed from the staking arrangement. In this case, the tax liability arises when the assets cease to be staked, irrespective of whether they are sold or transferred for another purpose. This approach ensures that the tax treatment aligns with the economic benefits derived from staking activities.
Which of the above is appropriate to your situation is dependent on the number of financial arrangements (including more traditional financial arrangements such as debt, non-NZD bank balances, bond holdings, etc.), the amount of interest and staking income, and expenditure in each year, and the amount of the difference between accounting for tax on a realised or unrealised basis. The appropriate method is also dependent on positions taken in earlier tax years.
Apart from the taxation of gains and losses on the value of staked crypto assets, the staking returns themselves are also subject to taxation. When a Staker receives rewards in the form of additional crypto assets, those rewards are considered income and must be included in the Staker's tax return for the year in which they were derived. The value of the rewards should be assessed at the fair market value at the time of receipt.
The taxation of crypto assets used for staking differs from the general treatment of cryptocurrencies, which is typically based on the presumption that they have been acquired with the intention of disposal and taxed only on a realised basis. As outlined in earlier articles, this presumption is not always appropriate and alternative positions may be adopted.
Tax policy recognises that staking is a specific activity and warrants its own tax considerations. Consequently, seeking specific tax advice is crucial to ensure compliance and optimised tax planning strategies.
We are aware of alternative views in the market. The majority of these appear to tax the staking return essentially as interest each year. There are differences in when/if gains or losses from the staked crypto assets are brought to tax, with some advisors indicating that the gains should be brought to tax when the crypto is sold, while others argue the crypto should not be taxed at all.
While it would be great to obtain further certainty from IRD, from our informal discussions, the IRD seems to agree that the financial arrangement rules should apply. However, provided that ultimately, the gains made on the crypto assets are brought to tax, it appears they may be flexible as to when any gains are reported. The IRD has expressed some reservations around assertions that crypto assets acquired for staking have not been acquired with an intention for resale. Those wanting to take such an approach should ensure they have retained contemporaneous notes as to why they are acquiring crypto and should seek tax advice.
Staking crypto assets can be rewarding. However, participants must be aware of the tax implications associated with this activity. Gains and losses on the value of staked crypto assets are subject to taxation, either on an unrealised basis at each balance date or on a deemed realised basis when the assets are sold or removed from the staking arrangement. Staking returns themselves are also taxable. There remains some uncertainty as to whether gains made after crypto assets have been removed from staking arrangements are assessable, and this ultimately comes back to your specific facts and circumstances.
Seeking professional tax advice tailored to specific circumstances is highly recommended to navigate the complexities of taxation and ensure compliance. Contact our specialist team today.
This document contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Crowe Australasia.