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Chapter 1: What is the crypto tax problem that investors are facing?
Kia ora, I'm Nadine Higgins and welcome to The Prosperity Project. If you invest in cryptocurrencies, beware, the IRD is watching. It's identified over 350,000 Kiwi crypto users and millions of transactions worth a combined $36 billion. So it wants its slice. So how do you know what you owe and what do you have to do about it?
Here to help us answer that is Tim Doyle, a crypto tax specialist and director of Doyle Accountants. Hi, Tim. Welcome to the Prosperity Project. So good to have you here. Thanks so much for having me.
Chapter 2: How has the IRD intensified its focus on crypto traders?
How hard is the IRD going at the moment on those who are trading crypto?
They've really stepped up their activity since 1 April. So before 1 April, we'd have a number of clients contact us every month and IRD would send out a batch letters of clients to the bigger fish, maybe those with $100,000 or $200,000 or more invested in crypto. And since 1 April, they've really broadened their activity and they're going a lot harder to everyone and anyone.
And when you talk to IID, they'll say they're nudge letters or they're encouraging an education perspective. But when you get down to it, they're really after collecting as much tax revenue as possible.
That's interesting. So they're not going to discount you just because you are not a big time crypto investor. If you are making a profit, they'd like a slice of it.
Yes, and they've been very intentional and very aggressive also at recovering the tax debt once it's actually been calculated as well. And some of those mitigating factors about perhaps, oh, I didn't know crypto was taxable or, hey, I got into this because it was interesting, just aren't quite cutting the mustard anymore.
Well, that is a good question. How do they know whether you are making a profit or not? Because I kind of maybe naively assumed that that was kind of beyond the reach of the tax man. They couldn't see what was happening.
They won't see like what's happening behind the scenes and the wallets and so forth, but they'll capture that data at the inroads and off ramp in terms of New Zealand dollars. So they've had this information already from all of the New Zealand major fiat on-ramps.
So think Bitprime, Easy Crypto, Daset, that they've got the data around how New Zealand dollars got into cryptocurrency, who the user is, how much it was, when it was, and then for their records, it's just easy picking and data matching between, okay, this person put this much into crypto, what's in their tax returns? And if there's nothing in their tax returns, then they'll get a letter.
But what's happened now from the 1st of April is that there's wider crypto asset reporting framework that's came in and the IRD have access or are going to have access to all of the crypto activity from OECD countries. And when I say that, it's just the centralised exchanges. So there's nothing on the decentralised
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Chapter 3: What mistakes lead to significant tax liabilities for crypto investors?
We run an online scorecard for prospect clients coming towards us, and 70% of them are non-tax compliant before approaching us. So it's a big number. And also, I think from IID's perspective, the market has changed significantly from 2017, nine years ago to today. A lot of people have made a significant amount of money in crypto, more so
from their jobs or from the housing market or from shares or precious metals. So there's a massive opportunity here for IOD to capitalise on that increase in wealth and it's historically gone under the radar too.
Why is a profit on crypto immediately taxable when if I was to buy a share and then, I don't know, have a change of circumstances and sell it three months later for a profit, that isn't necessarily automatically taxable?
Yeah, it's confusing, right? So New Zealand doesn't have a capital gains tax. Here we are talking about taxes on something that's arguably a capital gains tax in disguise. So the key reason is that crypto is classified as property. And there's a certain part of the Income Tax Act that says if you buy something with the intention to dispose of it, the proceeds are going to be taxable income.
And when you think about crypto, it's digital. It's intangible. We can't touch it. We can't see it. We can't do anything with it. So why would you buy it? And so IID take that default position that someone must have acquired it as a speculative investment to ultimately dispose. Whereas compared to like shares or properties, if you can buy shares, you can earn dividend income.
If you buy property, you can earn rental income. Or if you buy a car, you can drive it from A to B. So it's because it has no tangible use or it doesn't do anything for you, that's why they see it as the default position.
It's difficult to make an argument ā To the contrary, right? Because otherwise, what would be the purpose of it?
So we've tried to take that opposite view probably about six times now. We've got two still in play or two sort of open cases going down trying to take a non-taxable position. On what basis? I can't get into the specifics on one because it's confidential. It's really fact specific. But in terms of the other situation is that the client received crypto as a gift.
So he had no, if you receive a gift, you don't even know it's coming. What can your intention be at acquisition if you don't have one? So it's a material amount. The client wanted certainty. So we've put that position to IRD to make a ruling on. And that way we'll get that ruling and that'll form part of our basis of what we can do going forward.
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Chapter 4: How does the IRD determine if you owe taxes on crypto profits?
But if you're suddenly going to have all this tax compliance, you might kind of go...
Should I bother? Yeah, it's so easy these days to sit behind a computer. You can trade hundreds of tokens, thousands of trades, multiple different exchanges, click buttons, have the excitement, the sexiness of making significant amount of money up and down and not even be thinking about tax, yet it's so easy to do.
Yet the tax rules and also the accounting of it, trying to capture all that data, trying to actually account and tell an audit trail of all those different platforms is really complicated. So yeah, the tax needs to be front of mind. And this doesn't just apply to crypto. As people who, hey, if you're setting up a business, you normally go talk to an accountant and get some structure or
And even if you're clients, you're buying another business, you're buying a property, you're making an investment, you get some professional advice. But for the majority of these crypto people that we deal with, unfortunately, we're kind of the ambulance at the bottom of the cliff.
And that makes it sometimes really hard because you see these opportunities that, oh, I wish you had just done it better or if you had done this. And The reality is that 99% of our clients would have been better off just holding Bitcoin, just buying it and not touching it. And then they'd have no taxes to pay because it's only taxable when you sell it.
You'd have no accounting fees because there's nothing to do. It'd just be simple, but it's not exciting. It doesn't fill you up, right? You're there to make money to try and recognize, exploit market opportunities. Yeah.
In hindsight is a wonderful thing. There are some ways though, right, to structure things a little bit more efficiently from a tax perspective. We need to take a quick break, but we're going to dive into that after this. Welcome back to The Prosperity Project. We're talking crypto tax.
And I just wanted to talk about one of the points you made before the break, Tim, which was some people would have been better off buying some Bitcoin and just staying in it. But I guess people trade. They go from one type of cryptocurrency into another. Does that open up the risk that you might have made a profit over here, a loss over here?
Yeah, so all of the profits and losses for the entire financial year are consolidated together, and that's the single finger that you report to IRD. But you're right, it's not just the taxable aveners when you dispose the crypto. So it's not just a sale to back out to fiat or back out to New Zealand dollars. It's every time you dispose crypto.
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Chapter 5: Why is profit from crypto classified as taxable income?
So wallet addresses, API information from the exchanges, bank statements proving with evidence of what's gone into crypto. and then gathering all that data and creating a single source of all your transactions. So think of it like a bank statement which shows New Zealand dollars in, out, and a closing balance, and we're recreating that for every token that you've owned.
So you might have, if you've traded 50 tokens, you'll have 50 different bank statements all showing the quantities. That sounds like a nightmare. Yeah, it is, but that's what's required, and that's what IID will ask for because it's the evidence, it's the integrity of the data.
So I can't just sit back and say, hey, Ayada, you've got the information. I'll just wait till you come to me.
We've tried that. In some cases, they've accepted, oh, sorry, not just waiting for them, but they'll just want to take their reaction and audit you. So that won't work. What we've tried to do is take like, this is the New Zealand dollars in, this is the New Zealand dollars today. Let's just pay tax on the difference. And we've had really mixed approaches with that.
In some cases, they've accepted it. In other cases, they haven't. In my simplistic view, it's like a pragmatic approach, maybe where the amount is not material and it's an easy way to IRD to get their tax revenue and keep compliance costs down because it's not worth going into those extremes. But again, we're seeing IRD take this more staunch stance about,
So it's getting all that transaction data as the evidence, as the source of truth.
How did you end up becoming a specialised crypto tax accountant? Because people might be quite surprised to learn that that's even a specialty that you could take in accounting.
Yeah, so, well, yeah, back in 2017, I bought crypto, I traded crypto and created an absolute dog's breakfast. And then come the end of financial year, I had a tax bill to pay and had a massive... a lot of transactions to unwind. And it took me hours and hours of just thinking through and trying to do the calculations. And I thought, well, hey, if I've got this problem, someone else has.
And then it's kind of been like right time, right place, right market conditions, like been super lucky to be there in that early stage where it was taking off in New Zealand and work with like Easy Crypto and Bitprime and some of those backbone sort of foundational members of the New Zealand crypto community and sort of followed their journey.
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