The national tax authority of New Zealand, the Inland Revenue Department (IRD), has recently published binding rulings and guidance for salaries and bonuses paid in crypto, made under s 91D of the country’s Tax Administration Act of 1994.
This ruling applies only to salary and wage earners and not to self-employed individuals, and only for services performed by an employee for a fixed amount and as a regular part of his/her remuneration.
While some may find this as proof that New Zealand has officially declared that income paid in cryptocurrencies is legal, the future of crypto adoption is not as bright as one might imagine. This ruling simply establishes professional guidance for companies and employees on how to tax crypto-based salaries by maintaining cryptocurrency status as an asset and not as a currency.
The published document cited the New Zealand’s IRD commissioner, who has even made an effort to state that crypto is not a currency, not legal anywhere and even doubted its ability to be a store of value. According to Commissioner Naomi Ferguson:
“In the Commissioner’s view, crypto-assets are property. Crypto-assets are not ‘money’ as commonly understood (at least not at the present time). In particular, because crypto-assets are not issued by any government, they are not legal tender anywhere. Further, although acceptance of certain crypto-assets as payment for goods and services is increasing, they are not “generally accepted” as payment. Given the extreme volatility experienced to date, there are also issues around some crypto-assets’ ability to be a store of value.”
Not exactly the desired outcome we were hoping for from a government ruling.
What exactly is this ruling all about?There are two main issues: salary paid in crypto and bonuses paid in crypto. The commissioner of New Zealand’s tax authority has been asked to provide guidance and issue a ruling on how remuneration paid in crypto should be taxed when received by employees as part of their regular payments.
According to the ruling, crypto assets that are part of an employees salary or bonus will be subject to pay-as-you-earn (commonly known as PAYE) tax or Fringe Benefits Tax (FBT). In order for crypto salaries and bonuses to be considered under PAYE, they cannot be subject to a “lock-up” period, they can be converted to fiat currency on an exchange, a significant purpose should function as a currency, or their value is pegged to one or more fiat currencies. Other types of crypto assets paid to an employee that are not subject to PAYE will be subject to FBT.
Is this ruling considered groundbreaking as far as tax authorities’ acceptance of employee payments in crypto?Not entirely. The United States Internal Revenue Servicepublished guidance in 2014, which detailed the following:
“Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes? […] Yes. Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes.”
Nevertheless, the fact that the IRD published clear and detailed guidance to these particular issues signals that tax regulators are taking crypto seriously and know that it cannot be ignored anymore. The level of detail in this ruling is much higher than the ones we saw outlined in the 2014 IRS guidance.
Back in September 2018, a group of blockchain and cryptocurrency professionals and enthusiasts proposed a document for New Zealand’s IRD that suggests “accepting cryptocurrency as payment for taxes.” The proposal acknowledged the difficulty of liquify crypto to fiat as a tax payments barrier and suggested that crypto tax payments will encourage compliance. The recommendations also included tax exemption for trading crypto for other crypto.
Tax authorities now understand much more than the basics of “crypto as an asset or currency.” They know exactly how it should be done in practice. Now, all eyes are on the IRS to provide its detailed clarifications, as it promised.