Taxing the blockchain - cryptocurrency and employee remuneration
THURSDAY 19 JULY 2018
Author: Campbell Pentney
Bitcoin and other cryptocurrencies have seen considerable growth over the last 12 months, meaning the general public are
more aware than ever of these digital assets.
Businesses have also seen advantages to cryptocurrencies - developing blockchain technology or raising funds for
projects by way of "initial coin offerings" (ICOs) whereby tokens are issued in exchange for other digital assets such
as ethereum or neo coins.
So, if a business leader wanted to incorporate cryptocurrencies as part of their employee remuneration, is it possible
under current NZ legislation and what other factors would need to be considered? A recent Inland Revenue issues paper
starts to answer these questions.
Cryptocurrency as part of current NZ tax legislation
There is still considerable uncertainty as to the tax treatment of cryptocurrencies as the current law does not easily
accommodate these assets and Inland Revenue has only released general guidelines so far. However, Inland Revenue has
been working on reaching a more definite view on a number of technical issues and looks set to issue more detailed
information along with potential amendments to the tax legislation.
Inland Revenue has now released its first formal issues paper on the appropriate tax treatment of employee remuneration
paid partially in cryptocurrency – in some respects a similar model to employee share schemes, particularly where the
company is itself issuing its own unique tokens. This arrangement raises interesting issues from a tax perspective, most
notably due to cryptocurrency having properties that are similar to both money and property.
That issues paper proposes two possible answers under the existing taxation laws:
Such remuneration would be subject to the ordinary PAYE withholding tax rules (i.e. exactly the same as if the employee
was paid in money); or
Because the cryptocurrencies or tokens are not 'money' the fringe benefit tax rules would apply.
Inland Revenue does not yet have a definite view, but its initial position is that:
If the employee has an entitlement to full remuneration in cash, but agrees to receive cryptocurrency in exchange for a
deduction from their wages or salary, then the usual PAYE rules for salary and wages would appear to apply.
If the arrangement is a 'salary sacrifice', whereby the employee's total remuneration in cash has been 'sacrificed' in
exchange for a payment in cryptocurrency, then fringe benefit tax (rather than PAYE) will apply unless the
cryptocurrency can be considered 'salary or wages'.
The difficulty with the second arrangement is that arguably a payment of 'salary or wages' is limited to money and
Inland Revenue considers that cryptocurrency in its current form is unlikely to be 'money' as it falls short in several
respects. It is not a currency issued by a sovereign state, nor is it widely accepted as a means of payment (at least,
not yet).
However, Inland Revenue's tentative view is that the existing legislation can be interpreted in a way that 'salary or
wages' could encompass other forms of assets, especially having regard to the Interpretation Act 1999 which requires
legislation to be interpreted in light of modern circumstances. As such, the Issues Paper suggests that PAYE withholding
tax would likely be applicable.
What other questions should business leaders think about?
Some technical aspects are not covered in the paper – for example, it does not deal with any special rules for how PAYE
would be 'withheld' and how the remuneration should be valued. While this might seem straightforward if the
cryptocurrency has an equivalent NZD value, further complications might arise if the arrangement had characteristics of
an employee share scheme – e.g. if the assets are held by the employer and released in the future subject to certain
contingencies. Another complicating factor would be how tokens should be valued if they are yet to be listed on a
cryptocurrency exchange.
Further issues papers are expected on other tax issues relating to cryptocurrency – notably the application of GST and
the specific tax treatment of different types of cryptocurrencies and tokens, particularly in relation to those issued
as part of an ICO.
Interested parties are invited to make submissions to Inland Revenue before August 3.
If you are thinking about including cryptocurrency as part of your employees' remuneration, there will be issues outside
of the tax treatment to consider, such as the types of securities law issues that arise with employee share schemes. If
you have any questions about the new issues paper or related issues, please contact your usual Bell Gully advisor.
ends