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Tax rules are catching up with cryptoassets

Tax Alert - October 2021

By Ian Fay & Alex Chang


Following on from our previous article about investing in cryptocurrency (cryptoassets) and our article on blockchain forks and airdrops, the Taxation (Annual Rates for 2021-22,GST, and Remedial Matters) Bill currently before Parliament introduces a new definition of cryptoassets. The Bill uses the new definition to address the GST treatment of cryptoassets and also addresses the application of the financial arrangement rules. The Bill reflects that the law is catching up with current practice by proposing that the changes have retrospective effect from 1 January 2009, when Bitcoin was first launched.

The Bill recognises that cryptoassets are a complex and constantly evolving area. As more and more taxpayers start investing or dealing with digital assets, the Bill proposes a broad definition option for cryptoassets in an attempt to future proof the legislation and provide greater clarity on how tax laws apply.

Clearer definition of cryptoassets?

Both the GST Act and the Income Tax Act are having identical definitions of “cryptoasset” added. The proposed definition of cryptoasset is a digital representation of value that is designed to be fungible and exists in “a database that is secured cryptographically and contains ledgers, recording transactions and contracts involving digital representations of value, that are maintained in decentralised form and shared across different locations and persons; or another application of the same technology performing an equivalent function”.

The proposed definition of cryptoassets does not apply to non-fungible tokens. Non-fungible tokens or NFTs are units of data stored on a blockchain that certifies a digital asset that is unique and not interchangeable, such as photos, videos, audio, and other type of digital files stored on a blockchain.

GST treatment of cryptoassets

Currently, most cryptoassets are unlikely to be “money” for the purposes of the GST rules. As a result, the supply of cryptoassets is uncertain and could be subject to GST at 15%; an exempt financial services; or a zero-rated supply to a non-resident. From a policy perspective, the commentary to the Bill identifies that there three main issues if GST is imposed on transactions involving cryptoassets: (1) it disincentivises purchasing of cryptoassets by residents, (2) it results in double taxation, and (3) it increases compliance costs.

The proposed changes will exclude the supply of cryptoassets from the definition of services, effectively treating cryptoassets like money. While the supply of cryptoassets would not be subject to GST, goods and services which are bought using cryptoassets will still be subject to GST just like other goods and services purchased using money.

The supply of non-fungible tokens will remain subject to GST if supplied by a registered person.

Financial arrangement rules and cryptoassets

Financial arrangements (FAs) are broadly defined and include most arrangements where there is an exchange of value but a time gap between the giving and receiving of value, for example a loan. Some types of cryptoassets may be categorised as FA under the current rules, which could lead to accrual-based taxation on large unrealised gains and losses on some cryptoassets. Given the volatility of crypoasset values, to the extent that cryptoassets would be FAs this could lead to significant volatility in taxable income and resulting tax liabilities where the taxpayer does not have funds available to meet these obligations.

The proposed changes will treat most cryptoassets, other than those that are similar to loans, as excepted financial arrangements such that the FA rules will not apply, meaning that unrealised gains and losses will be outside of the tax net, but realised gains will be subject to tax (Inland Revenue have previously advised that all disposals of cryptoassets gives rise to income).

Deloitte’s Comment: Greater clarity but tax treatment of cryptoassets is still a complex area

While the introduction of a broad definition of cryptoassets and associated carve out from GST and FA rules is useful and provides some certainty, the tax treatment of cryptoassets remains a complex area. This will continue to evolve.

The changes to application of GST and FA rules to cryptoassets with retrospective effect from 1 January 2009 will bless the approach taken by many taxpayers to date. However, it will be interesting to see how Inland Revenue deal with taxpayers who paid the GST on cryptoasset transactions over the last 12 years as normal practice for reassessments is to only go back 4 years.

If you have any queries on the income tax or GST treatment of cryptoassets, or unsure of your tax obligations, please seek advice from your usual Deloitte tax advisors.

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