GST update - proposed exemption for Bitcoin and other cryptocurrencies

25 February 2020

​​​The New Zealand Government is proposing a GST exemption for “crypto assets", such as Bitcoin and Ethereum and is seeking submissions from interested parties.

The move, signalled in an officials' issues paper released by Inland Revenue on 25 February, is likely to be welcomed by investors and participants in the cryptocurrency industry. It sees New Zealand follow in the footsteps of Australia and Singapore by proposing an exemption for the supply of crypto assets generally, backdated to 2009 (the year of the creation of the first cryptocurrency, Bitcoin). The exemption itself may differ, however, with one option proposed going beyond the definitions used in those countries.

Variety and rapid development pose a challenge

The current tax position is that such assets likely fall within the scope of the existing GST rules. They are not technically “money" (as that term is limited to fiat currency issued by a sovereign state) and the existing exemptions are unlikely to apply except in rare cases. Under these rules, GST could apply at 15% to the transfer of cryptocurrencies from one person in New Zealand to another, which produces a range of problematic outcomes such as compliance issues and potential double taxation.

Cryptocurrencies are a form of digital property, stored and transacted using technologies such as blockchain. Unlike traditional financial assets, there is usually no third party intermediary involved in transmitting assets from one person to another. Over recent years, thousands of cryptocurrencies have come into existence with a wide range of properties – some might have features of money, while others might emulate the properties of shares or vouchers. Some comparisons have been made between Bitcoin and gold in terms of scarcity and possible store of value. The novelty and rapid development of this sector has prompted challenges for tax authorities and advisers as to the appropriate tax treatment for these assets.

While it's not likely many investors have actually returned GST on cryptocurrency transactions, if crypto assets are made exempt it will bring certainty to this area.

Given the wide variety of digital and crypto assets, the challenge is how wide the exemption should be, and whether this should extend to all cryptocurrencies regardless of their features.

A broad proposal

At this stage, one option proposed by Inland Revenue is a broader exemption than Australia and Singapore, possibly as wide as any asset that uses cryptography and blockchain. There are suggestions that other types of digital assets like blockchain based gaming currency, loyalty points and private tokens would be included in this definition. Some work will be involved in drafting a suitable definition – for example, some newer cryptocurrencies use alternative technology to blockchain (for example, a “block lattice" or “tangle") and therefore might already fall outside this proposed exemption. One reason stated in favour of a broad definition is that it avoids the difficulty and time in having to classify thousands of cryptocurrencies into prescribed categories.

The proposals only cover the supplies of crypto-assets from one person to another and will not cover related activities such as mining or cryptocurrency exchange services. This raises some questions – for example, it is not entirely clear whether mining should give rise to a GST liability when there is no other party directly involved in that process. New Zealand cryptocurrency exchanges will need to consider whether fees that they charge should be subject to GST as they may have assumed they had an exemption for arranging the transfer of financial assets in the same way that a bank or stock exchange might.

Income tax is also considered, with a potential exemption from the New Zealand “financial arrangement rules" for cryptocurrencies. These rules are complex and govern the timing of taxation of certain financial instruments. This may be welcomed by cryptocurrency investors who are already dealing with complex compliance issues when calculating their taxable income.

Fostering development and investment

Notably, an underlying theme behind the proposals is to encourage and foster technological developments and investments in this sector. As an example, under these proposals an entity wanting to raise funds by way of issuing crypto-tokens to investors could do so knowing that GST would not be an issue. However, that example would still raise a number of other tax and regulatory issues where further guidance is needed.

While these initial steps are welcome, further tax guidance or changes are still needed for other areas in this sector, specifically:

  • the income tax position of investors and traders generally,
  • the usage of cryptocurrency for minor personal transaction (e.g. buying coffee with bitcoin),
  • more contentious issues such as the tax treatment of a blockchain “fork" (when a cryptocurrency effectively splits into two coins). Interested parties should seek legal advance on any aspects relating to these types of activities, and
  • new developments in the space such as “defi" lending transactions where coins can be staked and generate passive income.

Other GST Developments

The IRD paper released also proposes changes to a number of other areas of GST law beyond cryptocurrency, in particular with changes proposed to the GST aspects of:

  • apportionments and adjustments,
  • fund manager and investment manager services,
  • insurance payments from insurers to GST registered third parties, and
  • the compulsory zero rating of land transactions.

Public submissions on the GST exemption close o​n 9 April 2020. We will provide further commentary on relevant aspects of these proposals in the near future.

If you have any questions on the matters raised in this article please get in touch with the contacts listed, or your usual Bell Gully advise​r. ​

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.