How to accept cryptocurrency as a New Zealand business in 2018
(Note: This is a work in progress, and it goes without saying that this is not financial advice. We are not accountants or advisors, and we’re only experienced with New Zealand law. You should contact your own accountant(s), in your own country, for personalised advice.)
CryptFolio is a New Zealand company to help people and businesses manage and track their cryptocurrency. It’s very important to our company to accept cryptocurrency as a method of payment — both from our users, and to our contractors.
With the recently issued IRD guidance on taxing cryptocurrencies as property, we’re still understanding how to apply this to our business.
From what we can understand, the best approach is to set up separate company wallets — distinct from our directors — and to treat all cryptocurrency exchange as property-for-fiat transactions, accounted for with FIFO.
This focus on fiat accounting simplifies our reporting and tax requirements, and reuses as much existing accounting infrastructure as possible.
FIFO accounting
First-in-first-out (FIFO) is one method to account for the gain/loss of property and assets, and appears to apply to cryptocurrency in New Zealand.
Essentially for every transaction and exchange, you record the value of the property bought/sold, and the realised gain in terms of fiat. You use the earliest valuations (first-in) for calculating the gain/loss (first-out).
For example, if you had 1 BTC worth $100, and you exchanged it for 1 LTC that is now worth $200, your realised gain would be $100, even though you haven’t touched any fiat currency.
(There’s also weighted average cost accounting, which we’re still investigating. New Zealand does not recognise LIFO accounting. FIFO appears to be the simplest one to get started with.)
Getting set up
Before you accept any cryptocurrency, set up separate wallets — perhaps on hardware devices, or mobile phones — to accept and issue transactions.
(This is nicely analogous to having separate business accounts for your business.)
You can then fund these wallets with cryptocurrency, either purchased on an exchange, or from you or someone else, at market rates.
Record the value of this cryptocurrency at time of purchase, for use in FIFO accounting later.
Accepting payments
When accepting a payment, always issue a receipt denoted in fiat currency (e.g. in NZD). Include GST, VAT or other taxes as necessary.
(We use CoinPayments.Net to handle the crypto-to-fiat conversion, allowing us to accept 18+ cryptocurrencies at once. The user gets to choose which crypto-currency they’d like to pay with, and we receive the converted Litecoin value.)
You can then accept the cryptocurrency payment as an alternative payment method for that fiat invoice.
This fiat currency value is used to calculate GST, VAT or other taxes as necessary. Taxes such as GST are then applied, and should be included in your GST return as with any normal fiat currency transaction.
After the invoice is paid, to reduce your exposure to cryptocurrency volatility, you may wish to immediately exchange this cryptocurrency for fiat. Otherwise, the cryptocurrency becomes property, valued as per the exchange rate on the date of the transaction, and this value is used for FIFO accounting later.
(We have found it difficult to find a NZ exchange that cheaply supports business accounts and automatic exchange.)
Paying others
When paying others, always pay them in terms of a fiat currency (e.g. NZD/USD). Include Kiwisaver, FBT, PAYE or other taxes as necessary.
(At this stage we prefer to use self-employed contractors, and our contracts explicitly state that any relevant employment taxes are the responsibility of the contractor.)
Make sure you get confirmation from the third party that cryptocurrency is an acceptable form of payment. You can then pay the invoice with cryptocurrency as an alternative payment method for that invoice.
As before, you may wish to immediately purchase that cryptocurrency on an exchange before payment, or you can use cryptocurrency you are already holding. In the latter case, you would then consider the realised gain/loss of the transaction based on the FIFO value of that property.
GST & income tax returns
Since all of our payments/invoices are now in terms of fiat (NZD), we can continue to use accounting software such as Xero to create and submit standard GST returns/invoice tax returns.
As we are now treating cryptocurrency as property, and that property has no income/tax obligations until the gain/loss has been realised, this makes our reporting simpler.
(Note: It’s still not clear how, or if, GST will apply to cryptocurrency exchange, to avoid GST double-dipping. Still waiting for IRD guidance on this one.)
Note on Foreign currency accounts
Note that if you or your business holds substantial amounts of foreign currency ($50k+), you may need to also consider the tax impact of financial arrangements.
Conclusion
Handling cryptocurrency is still an actively evolving space, and we look forward to seeing how the IRD interacts constructively with our crypto-currency community to develop further guidelines.
CryptFolio is currently developing tooling to help others with accounting with cryptocurrencies — so watch this space. If your business is looking for software or expertise to help put together your tax/GST returns, get in touch!
