Diana Clement: Is crypto investing taxable?

OPINION

Are you paying tax on your crypto investments? Crypto traders and investors come up with all sorts of cute reasons why they don’t, or shouldn’t, pay tax.

But just like shares or property investing,
it’s taxable, says Paul Quickenden, chief commercial officer at EasyCrypto.

“There is an element of crypto traders [who] don’t see why they should pay tax,” says Quickenden. “But the reality is that Inland Revenue has given guidance that taxation is applicable and you need to self-calculate and declare that.” That means completing an IR3 at the end of each tax year if you have sold crypto assets. .

There are some nuances in relation to the different styles of crypto investing, says Quickenden. But the reality is the IRD knows people who buy crypto assets such as Bitcoin and Ethereum are doing it to make a capital gain. Those gains are taxable as income.

Accountant Garreth Collard of EpsomTax.com says crypto investors generally fall into one of three broad groups when it comes to tax.

The first is those who trade regularly. Their realised capital gains on disposals are taxable as income at their marginal tax rate. These investors can claim realised losses against their other income. It’s very similar to trading shares.

Then there are two groups of investors who “Hodl” (Hold On for Dear Life) their crypto, which means they’re buy-and-hold investors, says Collard.

“The first subset of that is the person who buys crypto and Hodls it. Whenever they sell it, that gain will be taxable income for them.” says Collard. “These people are buying for capital gain even though they’re Hodling or holding.”

The second subset of investors is buying crypto to Hodl, but “stakes” [leases] or lends crypto, for a return. That return is taxable as income. “They declare their staking rewards, usually in the form of more crypto, on their income tax return,” says Collard. Because they’re paying tax on the income along the way, the capital gain when they sell is not taxable, according to current interpretations of the IRD rules. Losses can’t be claimed against other taxes in this scenario. The big but with all these scenarios is the IRD can change the rules or its interpretation at any time.

Anyone who is serious about their crypto investing and wants to trade in particular should seek advice from an accountant about holding those investments in a separate entity, rather than their own name, says Collard. It keeps their trading and any other forms of investment separate.

Social media and the world in general are full of misinformation when it comes to crypto. Because the assets are held on the blockchain, which makes it anonymous, investors often think they won’t get caught. Some will.

It takes considerable effort to hide investing forever. Cash inevitably finds its way into the financial system when investors cash out. Reporting entities such as banks have transaction monitoring systems, and they notify the IRD when they see activity that looks like it might indicate wrongdoing. What’s more, the IRD can at any time request records from crypto exchanges here.

One investor swore black and blue to me that he’d found a way around tax because he was effectively using borrowed crypto to invest. “They’re only fooling themselves,” says Collard. It’s the same as borrowing money for any other investing or business. The profit is taxable.

“Do you really want that skeleton in your closet? You open the door and at some stage the skeleton is going to fall out, bones and all. Besides that; come on, you want the benefits of living in a civilised society? Be a grown-up and pay for them,” says Collard.

Anyone caught trying to evade tax on crypto investment could rue the day. The accounting fees involved in an IRD audit can add up to many thousands of dollars alone. The errant taxpayer will then be charged the unpaid tax with interest and penalties on top. The fine is usually 100 per cent of the unpaid tax as well.

Increasingly, crypto is becoming something that is bought by the mainstream. Collard says his firm includes questions about crypto in the company’s annual questionnaire to clients to ensure they are compliant. “It has become very easy to purchase through [platforms] such as EasyCrypto. They have done a lot to democratise [crypto investment].”

Crypto investors need to keep on top of their records to ensure they are able to report back to the IRD. Some use the platform Koinly, a crypto tax platform that can take all of their transactions and produce tax reports.