The value of cryptocurrencies can be very volatile. In the past year, Bitcoin hit a record high - then fell sharply. Photo: CFOTO / NurPhoto via AFP
Investors who have to sell their cryptocurrency for a loss may be able to claim tax back from Inland Revenue (IRD).
IRD has made it clear that people who are trading cryptocurrency should pay tax on their gains.
In July last year IRD signalled it was honing in on people buying and selling crypto who were not declaring their income.
- Should I save or invest for my kid's financial future? Listen to No Stupid Questions with Susan Edmunds
It had identified had 227,000 unique crypto asset users in New Zealand undertaking around 7 million transactions with a value of $7.8 billion.
Last week, accountant Tim Doyle, who specialises in cryptocurrency, told Checkpoint nearly a third of his clients had received letters from IRD calling in tax they owe.
But the value of cryptocurrencies can be very volatile. In the past year, Bitcoin hit a record high - then fell sharply. It is down about 16 percent over the past month.
Deloitte cryptocurrency expert Ian Fay said anyone who bought at the peak of the market and then had to sell could claim a loss in their tax return.
People were taxed on the proceeds minus the cost of the asset and if the cost was more than the sale proceeds, it would count as a loss. "If you bought a few months ago hoping to make a quick buck and need the money you might have to liquidate, and could have a loss."
But he said it would only be people who sold their assets at a lower price than they paid for them that could claim the loss. People who had suffered a drop in the value of their portfolio but not liquidated might feel worse off but had not generated a loss for tax purposes.
People who bought a few years ago and sold today would pay tax on the proceeds, even if the gain was not as large as it might have been a few months ago.
Many crypto investors held their assets for a long time, he said, and were used to the swings in value. "It goes up, it comes down. It's still a very volatile asset class."
Fay said it was important to note that more people were investing in cryptocurrency funds, which were taxed differently. International exchange-traded cryptocurrency funds would usually be taxed under the foreign investment fund (FIF) rules, not as personal property.
Fay said Inland Revenue had dispelled a myth that people could hold on to their assets for a long time to avoid tax on capital gains. Because bitcoin and other cryptocurrencies did not offer income, it determined that people who bought them were doing so with the intention of selling them eventually, so the gains would usually be taxable.
He said some people might think their crypto trading was flying under the radar but Inland Revenue had increased access to data that would enable it to identify transactions.
Even transactions between different cryptocurrencies could generate gains that needed to be taxed, he said.
Sign up for Money with Susan Edmunds, a weekly newsletter covering all the things that affect how we make, spend and invest money.
