Crypto has become the darling of alternative investments, captivating the financial world with heart-stopping falls (hello 2021 and 2022) and meteoric rises (hello 2024 and the potential effects of halving). But amidst the adrenaline-fuelled rollercoaster ride that is crypto trading, many enthusiasts forget about taxation - mistakenly assuming crypto falls outside of the realms of more ‘traditional’ financial regulations.

Whether you're ‘hodl’ing (holding on for dear life) or engaging in frequent trading, remember that the taxman is keeping a watchful eye on your crypto earnings. With the financial year set to close out at the end of this month in New Zealand, here’s a beginner's guide to getting it right…

The bottom line

Alas, even in crypto - the taxman still cometh and your assets are subject to taxation under country-specific income tax rules. In simple terms, any gains or losses from your crypto investments must be declared as part of your taxable income within each tax year. Just like any other activity that you do to make a profit (such as your 9-5, running a business, trading stocks or setting up a lemonade stand), you need to pay income tax on the profits you make.

Income tax will normally apply to any ‘disposal’ of crypto – this includes selling for NZD/USD or trading it for another crypto. Income tax also applies to your income on crypto holdings, e.g. staking or yield.

Although this might ‘sound’ simple, it can be complex to manage when adjusting your portfolio, for example you may want to temporarily move your Bitcoin into stablecoin to wait out some market volatility and then get back in. Although you have not ‘sold out’ of crypto, the tax ticket is clipped with any gains and the question becomes (especially for high income earners) whether it is worth 'trading' dips when this may create a 31-39% taxable event.

There's no simple way to say this…

Rules and regulations around crypto gains vary significantly from one region to another and it's crucial to familiarise yourself with the relevant legislation in your specific regions to ensure you’re complying.

In general, however, there are some common principles that apply wherever you’re trading…

If you've made gains from your crypto ventures, you're obligated to pay taxes on those profits.

On the flip side, if you've incurred losses, you may be able to offset them against taxes paid in other areas, such as PAYE on your salary.

It's not all bad news…

But while the taxman may demand his due on crypto gains, there are certain situations in which you can breathe a sigh of relief…

You don’t normally need to pay income tax on any cryptocurrency you are holding and haven’t sold or swapped yet. This includes purchasing crypto with fiat currency. In addition, with crypto such as stablecoins in the underlying currency there is  no price change/volatility associated with a purchase/sale and no associated taxable event is triggered.

Similarly, if you're simply hodling onto your crypto assets without engaging in active trading, you may not be liable for taxes until you decide to sell or dispose of them.

Additionally, the transfer of Bitcoin between wallets, as well as gifting or donating crypto, typically does not trigger tax obligations.

When it comes to taxes, ignorance is never bliss.

With the crypto market booming and profits tantalisingly within reach, it's essential to remember your obligations to the taxman. Failing to report your earnings could land you in hot water with authorities. By familiarising yourself with the relevant tax laws in your jurisdiction, staying abreast of regulatory developments, and seeking professional advice when necessary, you can ensure that your trading remains both profitable and above board.* 

(*We always recommend getting professional tax advice. In New Zealand, Cryptocurrency Tax NZ can offer sound advice.)