Last week the IRD started questioning those with crypto-assets about their approach to tax. With questionnaires focussed on the past five tax years, the IRD is seeking to understand how taxpayers have treated their crypto-assets.
This includes requesting details of all transactions, balances held at year end, workpapers used to calculate taxable income and deductions as well as trading rationale (i.e., speculation, long-term hold etc.).
In doing so, the IRD has confirmed that they have already collected data on taxpayers’ Crypto-Assets. We have been aware for some time now that the IRD was collecting data, but this is one of the first times that this has been confirmed.
Over the past couple of months, with the latest request and some others we have received, the IRD has made it clear that Crypto-Asset gains will not always be taxable, and losses will not always be claimable. You must demonstrate your rationale for acquiring the Crypto-Asset and what activity you have undertaken since the acquisition. You must also be able to prove the amount of gain / loss that has arisen and returned has been calculated correctly.
In the meantime, the Organisation for Economic Co-operation and Development (OECD) is progressing towards their global reporting framework for Crypto-Assets, releasing the final framework earlier this week.
A few years ago, the OECD implemented a reporting framework focused on financial assets and requiring reporting by financial institutions. This framework, referred to as Common Reporting Standards, now encompasses over 110 jurisdictions, with another 10 committed to implementing by 2025, and 43 yet to commit to transferring data. The United States of America has not signed up to this as they have their own programme, Foreign Account Tax Compliance Act (FATCA).
Many of you will be familiar with this already – when you have opened bank accounts, KiwiSaver, etc. it is the portion of the form that asks for your IRD number, jurisdiction of tax residence and, if you’re opening an account for an entity, the nature of that entity.
Crypto-Assets, by their nature and design, have primarily avoided involving financial institutions. Therefore, these have often not been captured by the reporting framework. The OECD has been working towards creating a similar reporting framework for Crypto-Assets, putting the onus on those entities and individuals who essentially operate crypto-exchanges, or act as counterparties or intermediaries.
The OECD has now finalised their rules in relation to this reporting framework and it is expected that jurisdictions will start adopting this framework. For New Zealand, the IRD has indicated it is unlikely that it will adopt the change prior to 1 January 2025, principally to allow time for law changes, IT changes and implementation.
Additionally, while the US went their own way in relation to traditional financial institutions, indications to date have been they will follow the OECD model in relation to Crypto-Asset reporting. With many exchanges, counterparties, and intermediaries being located in the US, we expect the majority of transactions to be reported in future years.
While implementation is some time away, it is important to remember that there is no time restriction on the IRD making assessments if income has not been returned or disclosed.
Given the above, what should you, as a crypto investor be doing now?
Ensure you have records, ideally from the same time that you were acquiring the Crypto-Assets, as to your intent and plans are retained. Are there any records with others (financial planners, bankers, lawyers, accountants etc.)?
Ensure records of all transactions, including crypto-to-crypto exchanges, are retained for at least seven years post the crypto-asset being sold. You may need to download these when undertaking the transaction.
Ensure that your “cost of sales” uses one of the approved methods (i.e. first purchased first sold (FIFO) or weighted average cost). One of the common methods, last purchased first sold (LIFO), is not acceptable.
Review positions taken and ensure they continue to reflect positions you are comfortable with. This should be done in consultation with your tax advisor. Has there been disclosure given to the IRD about gains made but not taxed?
For more information or to talk to a tax advisor about your current crypto assets, contact our experts here.