We often think that cryptocurrency is used like money. It is transferable and has value; therefore, we can loan it to someone else who can repay us, perhaps with interest. However, from a tax perspective, current income tax legislation and IRD’s definition of cryptocurrency as property results in these transactions being like a square peg trying to fit into a round hole; it just doesn’t work.
To be clear, we are talking about cryptocurrency loans between two parties (not decentralized finance loans or DEFI)
IRD considers cryptocurrency to be property for tax purposes. On their website, they refer to it as crypto-assets, not cryptocurrency.
In some situations, our clients want to use cryptocurrency to lend money (or money’s worth) to someone else. However, because it’s taxed like property, it makes the situation unique, and therefore, it’s likely to operate like a lease agreement (leasing a car or a property) rather than a loan agreement (lending money).
If you give up ownership and control of your cryptocurrency, it is likely to be considered a disposal for tax purposes. This may have significant consequences.
Let’s take a look at an example.
Example 1: Car Loan
We’ve used a car here for the example because it is property, i.e., the same as cryptocurrency.
Background
John has a red Audi RS 6 car worth $200k
John lends his car to Peter
Peter decides to swap the red car for a blue car (it is still an Audi RS 6 worth the same value)
Peter then swaps the blue car back to the red car and returns it to John
Tax Implications
When Peter swaps John’s red car for a blue car, John’s car is disposed of.
This disposal, in our view, is a sale for tax purposes. John no longer has his car. The fact he got it back in the end is irrelevant.
Example 2: Cryptocurrency Loan
John has 1 BTC worth $150k NZD (that he originally purchased for $50k)
John lends 1 BTC to Peter
Peter decides to swap the 1 BTC for ETH
Peter then swaps the ETH back to 1 BTC and returns it to John
Tax Implications
John’s BTC has been disposed of. The profit is equal to the sale price minus his purchase price. Therefore, John has a taxable profit of $100k that he must pay tax on.
Other Comments
Under other commercial lease agreements, the terms of the lease often prevent the lessee from disposing of the property. Only the true owner of the property can initiate the sale. Think about selling a commercial property, and the tenant cannot sell the property, only the landlord. A lessee on a car lease cannot sell the car it is leasing, only the owner of the vehicle. However, in the case of cryptocurrency loans, the lessee often takes full ownership and control of the cryptocurrency (and it can dispose of the property).
Therefore, a cryptocurrency loan may be considered a disposal for tax purposes.
Summary
We recommend being careful when thinking or interacting with cryptocurrency loans. Often, we think it may be a good idea or simplistic. However, the current tax legislation in New Zealand makes this difficult and may have significant unintended consequences for such transactions.
Contact Us
Contact Tim Doyle for a call or meeting to discuss any cryptocurrency tax or accounting questions. Our office is in Cambridge, Waikato, or we can arrange a video conference call.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
