The world of cryptocurrency tax is full of hidden risks. Many investors cross the line from hobby to taxable activity without realising it. By the time Inland Revenue gets involved, the situation can escalate into penalties, interest, and a lengthy investigation.
Recently, we helped a client navigate a complex cryptocurrency case with IRD. Through a carefully prepared voluntary disclosure, we secured a fully compliant, tax-free position on the first $150,000 of gains. This resulted in tax savings of around $55,000, got IRD off the client’s back and also ensured a clean slate for the future.
Here’s how it unfolded.
From Hobby to Taxable Activity
Our client, let’s call him Jason, started playing blockchain-based games like Axie Infinity and CyberKongz in 2021. His initial outlay was modest, just over $1,000, which he used to purchase Ethereum and then swap for in-game tokens.
Jason played purely for fun. He had a full-time job and a newborn baby, so gaming was a casual pastime. Over six weeks, his in-game NFTs and tokens rose dramatically in value, reaching about $150,000.
At this stage, Jason was not tracking values, keeping records, or planning to sell. In his mind, this was just a hobby. We took the position it was no different from collecting Pokémon cards or building characters in an online RPG.
The Tipping Point: Cashing Out
In June 2021, everything changed. Jason discovered how simple it was to convert his in-game assets into New Zealand dollars. That same day, he made his first withdrawal of just under $10k.
From that moment, his activity shifted. Over the next nine months, Jason withdrew more than $400k in cash in the next 9 months.
Inland Revenue’s framework is clear. Once an activity becomes systematic, profit-driven, and involves regular withdrawals, it crosses into taxable territory. The first withdrawal became the tipping point where Jason’s hobby moved into the tax net.
Identifying this exact moment was the key to protecting Jason’s earlier gains.
Securing the First $150,000 as a Tax-Free Windfall
Our strategy focused on separating Jason’s early activity from what came after. We argued that the initial $150,000 increase in value was a windfall gain, similar to someone discovering an old box of trading cards that suddenly became valuable due to demand.
Under New Zealand tax law, windfalls gained before there is any intention to profit are not taxable.
To support this position, we presented Inland Revenue with detailed evidence:
Blockchain records proving no withdrawals occurred before June 2021
Gaming data showing how NFTs were accumulated through play
Employment records confirming Jason’s full-time job and lack of business activity
A clear timeline showing when withdrawals began and income activity started
Because the case was meticulously documented with clear evidence, Inland Revenue accepted that the first $150,000 was a non-taxable gain. This resulted in $55,000 of tax savings for Jason.
NFTs: The Extra Layer of Complexity
NFTs added another challenge. Unlike standard tokens, each NFT represents a unique item, such as a character, weapon, or piece of virtual property. By the time of the disclosure, Jason held over 35,000 NFTs across multiple games.
Valuing each item accurately was impossible. Many had no reliable market price and fluctuated wildly depending on game updates and player activity. In one game alone, Jason had over 2,300 NFTs ranging from swords to decorative furniture.
Instead of trying to track every transaction, we proposed a practical methodology based on overall balances and key tipping points. This allowed Inland Revenue to accept a fair and workable approach without requiring impossible levels of detail.
Returning to Hobby Status
By 31 March 2022, Jason’s gaming slowed significantly. He stopped withdrawing funds and went back to playing purely for enjoyment. There were no further profits, and his NFT holdings grew only through casual in-game activity.
We successfully demonstrated that from this point onward, Jason’s activity had returned to hobby status. This meant there were no ongoing tax obligations, with only a small increase in value needing to be included in future tax returns.
What Could Have Happened Without Action
Although Jason had received a letter from Inland Revenue, advising him to return his gains, if Jason had waited (and not complete the voluntary disclosure), the story would have been very different.
He could have faced penalties of up to 150% of the tax owing, plus interest
Inland Revenue might have demanded exact records for all 250,000+ transactions, an impossible task
A drawn-out investigation could have created years of stress and uncertainty
By coming forward voluntarily, Jason took control of the situation and avoided these consequences.
The Outcome
The final result was a success:
The first $150,000 of gains treated as non-taxable
$55,000 in tax savings
Inland Revenue accepting our methodology without a formal audit or risk review
A clear compliance pathway for future crypto activity
Jason now has certainty, peace of mind, and a clean slate moving forward. Yes, he still had to pay a sizeable
Why This Matters for Other Crypto Investors
Many cryptocurrency users are in a similar position to Jason without even realising it. We regularly see situations where:
A casual hobby grows into taxable activity without warning
Poor records make accurate tax reporting nearly impossible
Inland Revenue reviews and audits create financial and emotional stress
Penalties and interest multiply the tax bill
The best way to avoid this is to act before Inland Revenue contacts you. A voluntary disclosure can save thousands of dollars and protect you from penalties.
Take Action Now
Cryptocurrency is evolving quickly, and Inland Revenue is increasing its focus on this space. This case is just one example of how our specialist crypto accounting team achieves outstanding results for clients across New Zealand.
If you are unsure about your tax position, now is the time to act. A confidential review could be the difference between a clean slate and a costly audit.
This article has been approved by our client and his name changed for confidentiality reasons.
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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.
