New Zealand Proposing to Remove Tax Barriers to Cryptoasset Investment



New Zealand’s Inland Revenue Department (IRD) is proposing retrospective changes to New Zealand’s tax rules to simplify the taxation of cryptoassets and encourage the development of New Zealand’s cryptoasset sector. Simon Akozu and Zoe Barnes of MinterEllisonRuddWatts discuss the problems facing New Zealand’s cryptoasset sector under the current tax settings, and explain the solutions proposed in the IRD’s officials’ issues paper.

New Zealand’s tax rules have not kept pace with the fast moving cryptoasset sector. This has resulted in confusion over the taxation of cryptoassets, and over-taxation in certain cases.

Take GST (good and services tax—New Zealand’s value-added tax), for example. Under the current tax settings, it is arguable that cryptocurrencies do not fall within any relevant exemption from GST, even though currencies are generally exempt from GST. Accordingly, it is arguable that a New Zealand seller of a bitcoin (for example) could be liable for GST on the sale of the bitcoin to a New Zealand buyer. This would be highly problematic, given the nature of cryptocurrencies and cryptocurrency exchanges as:

  • it may not be possible for the seller to verify whether the buyer of the bitcoin is a New Zealand resident or not (this is relevant to whether a GST rate of 0% can be applied to the sale);
  • even if it were possible for the seller to verify that the buyer is a New Zealand resident, given the nature of cryptocurrency exchanges it would be impractical (if not impossible) for the seller to try to charge the buyer a GST “gross up,” i.e. the seller would need to bear the full cost of GST;
  • worse still, we expect the seller would have difficulty claiming an input tax credit for the purchase of the bitcoin. This could mean the seller is exposed to GST at the rate of 15% on full proceeds from the sale of their bitcoin, with no offsetting input tax credit.

There has also been confusion around whether equity instruments that are structured as cryptoassets are exempt from GST. These issues are acknowledged by IRD officials who note that “The current GST rules provide an uncertain and variable GST treatment making, using or investing in cryptoassets less attractive than using money or investing in other financial assets.”

The income tax treatment of cryptoassets under the current tax settings has also been problematic. To their credit, the IRD has attempted to address this by releasing papers on an ad hoc basis explaining the income tax treatment of cryptoassets in various circumstances (e.g. where employees are paid in cryptocurrency). However, there are more fundamental, broad-ranging questions that have not been addressed. In particular, it is not yet clear how New Zealand’s “financial arrangements” rules apply to the many forms of cryptoassets in existence. If these rules apply to a cryptoasset, the holder of the cryptoasset can be subject to New Zealand income tax on unrealized gains on that asset.

In our experience, the uncertainty around cryptoasset taxation, and the potential for over-taxation, has stymied the development of New Zealand’s cryptoasset sector, and is forcing New Zealand innovators in this space to consider taking their ideas offshore.

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