Skip to content

Taxing Crypto 101

It is very common to receive crypto income and not declare it to Inland Revenue because people do not know that some of the ways crypto transactions occur create taxable events.

The income tax calculations for crypto currency activities are complicated. Until quite recently, there was no reliable software or online tools to assist with the income and tax calculations for crypto. There was also very little guidance on the taxation of crypto internationally or in New Zealand.

The following are examples that create taxable events in the crypto sphere.

Decentralized Finance (DeFi)

DeFi is a term for any application that uses blockchain and crypto technology to offer financial services peer to peer without relying on a financial intermediary. The technology is so new that most tax offices, including IRD, are yet to issue specific guidance.

DeFi applications are commonly built on the Ethereum blockchain and were designed to communicate with a blockchain, allowing people to take out loans, swap crypto, or use their crypto for purchases, or trading, giving investors more control over the asset.

What is a DeFi loan

DeFi loans are handled automatically by smart contracts. The smart contract holds the crypto as security for the loan and it is returned to the borrower once the loan is repaid. If the value of the crypto falls below the value of the loan, additional crypto must be added to cover the shortfall or the loan defaults and is liquidated, much the same as a mortgage.

Inland Revenue says a smart contract results in a transfer of beneficial ownership,

and therefore a disposal of the crypto for tax purposes. A person may not realize that this lending arrangement could trigger a taxable event once crypto is used as collateral for a loan, in the same manner that one would not expect to be taxed on equity used from a house to purchase another property.

What is an airdrop

An airdrop is when a blockchain protocol (typically a startup) distributes tokens or coins to users for free to increase project awareness, build communities and to encourage participation when it becomes available. Participation in the airdrop may require holding certain crypto or completing a small task such as sharing social media posts.

Airdrops are taxable as ordinary income. The income tax is based on the value of the coin received in the airdrop at the time of the airdrop.

What are Wrapped Crypto Tokens

Wrapped crypto tokens (wrapped crypto) are digital assets that mirror the value of another crypto from a different blockchain. Wrapped crypto is created to bridge the gap between different blockchains such as Ethereum and Bitcoin which operate on different protocols and cannot directly interact with each other. Wrapped crypto bridges this gap, allowing crypto from one blockchain to be used on another.

From a tax perspective, wrapping crypto is viewed as exchanging one crypto for another which creates a taxable event.

An example was RenBTC, the tokenised version of Bitcoin that operated on blockchains like Ethereum. Wrapping and unwrapping crypto using RenBTC created taxable events as wrapping was seen as a taxable event from disposal and the unwrapping as an acquisition.

What is an Initial Coin Offering (ICO)

An ICO is a process or event in which a company (especially a start-up) attempts to raise capital by selling a new cryptocurrency, which investors may purchase in the

hope that the value of the cryptocurrency will increase, or to later exchange for services offered by that company.

When a person participates in an ICO, a taxable event occurs because they lose the beneficial ownership of the crypto, making it a disposal for tax purposes.

The second taxable event occurs when the coins from participation in an ICO are received.

As you can see its a complicated affair and one that trips up many traders of cryptocurrency in New Zealand.

Mary Nelson is a seasoned expert in crypto currency tax and can help with any crypto currency issues you have.

If you are looking for a crypto currency lawyer then look no further.