The taxpayer had previously been a New Zealand resident that had moved offshore for more than 10 years and was now looking to return to New Zealand. They held cryptocurrency in overseas crypto centralised exchanges (CEX) and decentralised exchanges (DEX).
The Taxpayer sought a ruling from Inland Revenue on whether they would qualify as a transitional resident upon immigration to New Zealand and if so, whether the sales of their crypto assets would be exempt income, and therefore not taxable for the four-year tax exemption period, under the transitional resident rules.
Transitional tax residency
A person will qualify as a transitional tax resident if they:
· are a new migrant or New Zealander returning home
· qualified as a New Zealand tax resident on or after 1 April 2006
· The person had not been a transitional resident preceding the 10-year non-resident period.
If a person qualifies as a transitional resident, some income they earn that would normally be taxed in New Zealand is exempt from income tax for 48 months (4 years) from the date they first become a tax resident either under the permanent place of abode test, or the 183-day rule.
The main issues considered in this ruling were:
· Whether the Taxpayer would qualify to be a transitional resident.
· Whether the amounts derived by the Taxpayer from the sale of cryptocurrency he held through overseas centralised exchanges (CEXs) or decentralised exchanges (DEXs) had a source in New Zealand.
Inland Revenue concluded that the sale of crypto in the four year (48 month) transitional residency period would not be taxable because:
· The Taxpayer would qualify to be a transitional resident (on the presumption certain conditions were met).
· The amounts derived from the sale of cryptocurrency did not have a source in New Zealand in the transitional period.
What is a centralized exchange (CEX)
· A centralised exchange is a government regulated centralised cryptocurrency exchange that operate similarly to traditional online brokerages
· Users can buy, sell, and trade cryptocurrencies, with a single entity controlling the entire process · They can conduct exchanges from fiat to cryptocurrency (or vice versa) and be used to store cryptocurrency.
· Examples of centralised exchanges: Binance, Coinbase, Kraken, and Easy Crypto
What is a decentralized exchange (DEX)
· A decentralised exchange is a peer-to-peer exchange where transactions occur directly between crypto traders. There is no intermediary involved in the transaction, and they are generally not regulated.
· Decentralised exchanges only allowing crypto-to-crypto exchanges. They do not conduct exchanges from fiat to cryptocurrency (or vice versa).
The source of the crypto
Inland Revenue said that the relevant source rules were those that dealt with business carried out in New Zealand, contracts made or performed in New Zealand, the disposal of property situated in New Zealand, beneficiary income from a trust fund sourced in New Zealand, or from any other source in New Zealand.
Crypto and Businesses carried on in New Zealand:
IRD said this section did not apply because:
· IRD thought it likely that the Taxpayer had not acquired the crypto for business purposes, and the volume of trades supported this view.
Crypto and Contracts made or performed in New Zealand
IRD said the contracts were not made or performed in New Zealand because:
· The overseas centralised exchanges were located outside New Zealand,
· As DEX was decentralised, it was not practically possible to attribute a location to it and, as such, it will not be possible to conclude that the contract was made or performed in New Zealand.
Crypto and Disposal of property situated in New Zealand
IRD noted that crypto was considered property. The question was them whether the crypto was located in New Zealand.
· IRD considered that intangible assets that operate over DEXs, and are not registered in any country, did not have a location.
· That the cryptocurrency would not be situated in New Zealand merely because the Taxpayer would be resident here.
Crypto and Beneficiary income from a trust fund that has a source in New Zealand
· To be beneficiary income, the amounts from the sale of crypto had to be derived by a trustee before being paid or distributed to the Taxpayer, which in this case, it was not, and therefore this section did not apply.
Crypto and any other source in New Zealand
IRD concluded that this section did not apply.
· Though not free from doubt, there was no causative link between where crypto is bought and sold on overseas centralised exchanges and DEX, and that income and source being in New Zealand.
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Reference: Tax Information Bulletin Vol: 37 No 1 February 2025
https://www.taxtechnical.ird.govt.nz/tib/volume-37—2025/tib-vol37-no1