Cryptocurrency - Doom or Boom?
Okay, so for most of us, Christmas 2018 wasn’t spent talking about cryptocurrency. A far cry from just 12 months’ earlier.
Now that the dust is literally starting to settle around cryptocurrencies, it is a good time to assess where they stand, financially speaking, and from the perspective of Inland Revenue.
If you were one of the unfortunate ones caught up in the Cryptopia hack, you may be entitled to a tax deduction. As cryptocurrencies are treated as property, then if they are stolen a tax deduction would be allowed for the cost of the written-off amount during the income year that the theft occurred. However, this all depends on whether or not compensation is received from Cryptopia or an insurer, which is yet to be determined.
What to do with gains and losses
Inland Revenue has said that cryptocurrencies are property for tax purposes (rather than a type of currency). This means that any gains or losses should be calculated on sale or disposal. Due to the fact that cryptocurrencies rarely make distributions, it is highly likely that they were acquired for the purpose of disposal.
It is also important to note that “disposal” includes the exchanging of one cryptocurrency for another. So, if during an income year you switch from one exchange to another, this is a disposal and any associated gains or losses would need to be calculated at that time.
If you do have a cryptocurrency that makes “distributions” of any kind, this is where things start to get more complicated. You will need to look at your purpose behind its acquisition (i.e. for the distribution returns, or for the potential capital gain).
Working all of this out is messy, to say the least. You need good records, but it could be worth it because the silver lining is that you can write off your losses against other income, even salary and wages
Had enough of cryptocurrencies?
Finally, if you’re looking to get out of cryptocurrencies and sell up, there are a couple of points to keep in mind:
- The full amount you receive from the sale of your cryptocurrencies will be treated as gross assessable income – this will already have any “mining fees” deducted from it.
- The initial cost of purchasing the cryptocurrency should be tax-deductible, with the difference between the gross assessable income and the cost being your net profit or loss.
- Selling cryptocurrency is similar to selling a foreign currency and realising any gain or loss, in the sense that you must calculate any gain or loss on the day that it is sold.
The world of cryptocurrencies can be complex and confusing. If you have any questions or would like assistance in dealing with cryptocurrencies, contact your local BDO adviser.