Kevin Whitmore: Kia ora koutou welcome to another Web3NZ Learning series event. Today we are talking about taxing digital assets and taking you through the journey, a journey through the current landscape in New Zealand. So we are fortunate to have Rachael Gemming from EY, Andrew Evison from IRD, and Will Edmonds also from IRD.

I'll get them to introduce themselves in a little bit more depth in a second. But first of all, just a bit of housekeeping. So if you do wanna ask a question please enter it into the chat function. Today we will be answering a lot of the questions that have already been asked prior to the session.

So they've been woven into this presentation. But if anything additional comes up, please put it into the chat and we will answer it at the end. This session is being recorded. It will be transcribed and uploaded to the Web3NZ knowledge base after this. And just at the end as well, we'll have a short survey.

The survey is really helpful in terms of obviously orientating the format of these sessions, but it also has a question about future topics that you might want to have stood up in terms of the learning series. So please, please fill that out. And that's very useful from, from our side. And just finally, in terms of format for today, it will be 60 minutes of presentation.

And then people are, are welcome to drop off at that point. There'll be a 30 minute optional Q and A at the end. And people are very welcome to hang around for that and ask some questions or head off into your day. So with that, I will hand over to the team just to do a bit of an introduction to themselves.

So Rachael, Andrew, and Will, if you want to introduce yourselves.

Rachael Gemming: I'll kick off. Hi everyone. Rachael Gemming. I'm Associate Director in tax at EY. And I'm here to share with you some thoughts on crypto tax starting with a 101 today, and then building up into some areas of uncertainty, which I guess is, is kind of my favorite thing to be honest.

The, the uncertain areas in Web3 are really exciting and my role is to help people navigate the uncertainty head on and fly and do all those great things you're building whilst navigating and getting your tax taxes sorted. My background in crypto came from when I was with Inland revenue.

I started the crypto program when I was there a while ago, but I moved to client side because it was. Yeah, too exciting to say no. So I've worked alongside Andrew for a long time in my old role, and I have to say the relationship with IR is really great. I'm grateful for it, and I think you'll see today how we all work together.

Thanks, that's me.

Andrew Evison: Awesome. Over to me, I'm Andrew. I'm from the Inland Revenue. I'm a, my role is as a technical specialist at the IRD. And as Rachael said, I, I picked up the crypto kind of program when Rachael left. My, my background in crypto is a lot shallower. I, I have $20 worth of Bitcoin. That's as far as I've got.

So with, with my role in crypto, I think the key thing is, is what we are trying to achieve is create a, a wider understanding of the tax issues that relate to crypto assets and that's the existing law. So, so we've tried to put a lot of effort into our, our website material. I'm gonna talk in a general sense about that today, and then it's taking it further to try and understand the domain, what's going on.

And then there's the stuff Rachael talked about, the new stuff and, and, and that doesn't fit neatly with the current, our existing tax regime. So it's kind of what we're trying to do to help with that. And then that flows into Will in the policy area for the future. That's it for me.

Kevin Whitmore: That's cool. We might, we'll, we'll come back to you afterwards for an intro once we've sorted out the, the audio. All good. Rachael, do you wanna kick us off and I'll launch into the presentation?

Rachael Gemming: Great, thanks Kevin. And will, you might be back, should we give you a chance to introduce yourself? Test your microphone. Do you think you're good? Oh, nope. Keep trying. We'll circle back. Okay. No problem.

Rachael Gemming: So to set the scene, I thought I'd just kick off with a little bit around the Web3 community. Why, why you are here effectively is because you want to learn more. I commend you for getting into this stuff. Not only are you in the brave new world of Web3. Tax issues in this space is really exciting.

What I think is important is when you, when you are talking with IR or your advisors, have a think about communicating your role in Web3. Are you a creator? Is that your business? Is that what you're doing? Are you a customer? Are you a recipient of tokens? Are you operating a platform or some sort of infrastructure to help people engage in the Web3 environment? Or are you a marketplace or an exchange?

That's really important or a combination to be fair because that sets the scene for how the tax laws apply to you. So I think just getting your narrative, your story, your role right, is really important. And I spend a lot of time with clients unpacking exactly what they're doing and, and how it all works.

I'd say understand whether you, whether you have a token. A native token to your business is quite important, whether you've done a raise or or a mint. And then mapping the life cycle of that token, the tax flows from all the different taxing points. So minting and then issuance, and then whether you have a treasury function or hold some of the tokens, what you do with them whether you give them away or dispose of them, just how they work in your whole ecosystem. Again, that's really important to map out when you're talking to people because that's again, how the tax flows from there.

Something founders have as an option is to pay your team in crypto. So have a think about that too, because sometimes that can be used as an incentive. There isn't a matching employee share scheme. Tax principles the same as there is for regular shares, but you can use tokens as incentives. And I, I have given guidance on, on certain facts, scenarios. There's some public rulings there, but I think you've got that option. It doesn't quite match the same in terms of deductibility. So there's some pros and cons, but how cool that you've got that option in this space.

And then I think also just how does your accounting system and your tax function work? Are you set up correctly? And I see a lot of clients that, that don't quite have this right, or they find there's difficulties. You know, to be fair, Xero or whatever accounting system isn't built for crypto. So where the traditional and the new combine you, you do have some challenges. So just making sure that all your records are right. IR will always ask you about that, but, but I do see that there's some problems not just with, you know, foreign exchange and converting.

And then yeah, how you communicate this stuff is important because you'll have stakeholders other than the founding team, your employees. Often you're looking for investors, you need to communicate to Callaghan you know, you might be talking to them about your research and development tax incentive and what you're doing in the blockchain and Web3 space. You have to be able to articulate what's happening and if you are looking for investment you've got a runway, you've got readiness and potentially diligence coming.

So you really need to get sharp on, on how you communicate, what's going on with your tokens, and then how you're across the tax to make sure you don't have an exposure. So, yeah, I like it when questions are asked and answered. But really, you know, your business, you know what you're doing. If you come armed with that, then people, you know, tax geeks like us that are also crypto geeks that went down the rabbit hole we can help you out.

So hopefully that just gives you an idea of what you bring. And then today we're gonna, we're gonna share some of what we bring. Thanks Kevin, for driving the slides. I'll let you push on for us. Lovely.

Rachael Gemming: I thought I'd just give you an outline because there's a bit of a challenge here and, and the IR team will talk about their guidance that's on the IR website and some of the work they've been doing. But I think it's fair to say that a few years ago, a crypto asset portfolio was relatively straightforward.

A typical person might've been expected to, to have some Bitcoin, some Eth, some alts might've been experimenting with different blockchains that they liked, might've been picking some winners. I see the evolution happened pretty quickly after some of the early defi things or say MakerDAO got involved, people kind of took off and started experimenting.

So on the right hand side, you've got a, kind of a modern portfolio. To be honest, this has taken from one of my clients who's involved in every single one of these things on the right hand side, great fun for me to help as an advisor. But also, none of this stuff is straightforward and a lot of it isn't covered by the IR guidance.

Where it gets tricky is when you get into uses of some of these different things. You know, yield farming is different to liquidity mining, layer twos, bridging and wrapping. The IR team are gonna touch on some of these things later. But they all have different tax treatments, so you really have to unpack each of them.

The way I've presented this here is as a, as kind of an individual person, someone who's got crypto and they might be experimenting or doing things, they could actually be quite heavily involved and could be staking, for example. But the point we wanna make is that, The old way of looking at crypto was that you would get it and you would see what would happen effectively put under the mattress.

A lot of people were speculating and so a lot of the guidance is written with that in mind. On the right hand side, with the advent of defi, you can earn income off your crypto, you can get a yield, you can use it for collateral. You can do all sorts of different things to allow you to, to generate some income. It's not just a wait and see kind of thing.

So I'm quite excited by, by the current state and how it's evolved, but I think in terms of Web3 founders, what does your portfolio look like? It won't be like this. I don't think there's a typical founder portfolio or approach, and that goes back to the roles that I mentioned earlier.

There's gonna be uniqueness and differences every time. So I don't think some of the guidance that's out there is written with, with founders, with, with crypto businesses in mind. And Andrew can touch on this, but when we get to the part around talking about some of the sections, the taxing provisions a lot of them are written with, with individuals in mind that have upgraded or that are, that are trading, for example.

So just keep that in the back of your mind that actually the founders is quite exciting. Enterprise crypto tax is very new and unsettled. So this is where we're here to help you. Cool. I'll pass over to Andrew. He's gonna take you through some of the building blocks into the, into the way the IR look at tax and Crypto.

Andrew Evison: Thanks for that, Rachael. Thanks for setting the scene and, and the introduction to the crypto assets and the way it evolves. I think just to talk, generally speaking about our guidance material on the website, then we'll fire into this, is that we are looking more from the, the buyers and sellers of crypto asset in those guidelines.

And, but we do wanna evolve them into you know, business activities or, or enterprises that undertake activities. But it's kind of understanding how all of that works and then working through it. So, I mean, the key thing from today is, we'll, we'll tell you where we're at in terms of the crypto assets material that we have and what we've looked at.

But we fully understand that the future is gonna be a completely different sort of setting in this domain. And to that extent, the law that is in place now, may not neatly fit with that future. And, and kind of like with that, that's Will's place. We've got this future that might be five, it might be 10 years, it might be 20 years away.

But it's really important that we put in place stepping stones to understand that new world what it, what it's gonna do, how businesses are gonna operate. And then the IRD won't jump, won't be able to change law instantly. It takes time to do that. But if we're on the pathway to understanding how, how the domain works and how it's gonna be in the future, we can start to put some stepping stones towards that for the future.

But the here and now is, is where we're at today. So this first slide is just very much introductory to the concept of what I'm talking on, on today. I think go into more detail on these things as we go through, but just generally speaking, crypto assets are considered to be personal property. They're not money. We still have debates with customers about that treatment it being a currency type of thing, but I think it's fairly well settled that crypto assets are our personal property.

So as, as a consequence of that, the personal property sections of, of the income tax act apply. A lot of initial discussions were around New Zealand doesn't have a capital gains tax regime, so we don't tax capital. But our, our personal property provisions do have an element of, of taxing capital, what is effectively capital gains through them. I think the key concept with the crypto asset domain is that income arises on disposal, like Rachael mentioned, the ability to get income streams.

So we'll talk a bit about that more specifically shortly. But your purchase, your sale, your disposal, I should say, your disposal is what triggers income. I think if we look at Rachael's slide 2017, generally speaking, IRD would say that most disposals would give rise to tax issues. Obviously that's the setting of our guidelines, but each individual person specific situation needs to be carefully looked at, and then that's our approach to this.

And then as you move forward to the further to the right, 2003, the way crypto assets are evolved it's just important to understand the income streams, what that means, and, and the purpose of, of the acquisitions are just fully getting our head around that. Losses. The, the tax law taxes profits, so when losses arise there, there can be deductibility of those.

Interestingly New Zealand allows losses in that crypto asset to be offset against other types of income. Many other jurisdictions, Australia, UK don't. If you've got a crypto asset lost it's ringfenced. They tax the gains as they flow through. But the, the losses are ring-fenced waiting for future capital gains.

So our, our laws actually are a little bit more generous in that sense. There's a bit about income streams to talk about and then our website. So just go into the IRDs website, landing board, put in crypto assets, and that'll take you to where our material is. It's a little bit like layered, so you have to keep going down and down and down.

You find a bit that's useful or relevant to you. Then there's a bit more. So it's important to go right to the end of those trails. Sometimes we find customers jump out early and don't get the full picture. And that's something we will try to work on in terms of making them more effective in the future.

So that, that's just a very quick introduction. If we could go to the, the next slide please, Kevin.

Andrew Evison: So I've just got a slide here about Cryptopia, and it's not really an important facet here, but leading up to the Cryptopia, decision in, in the high court, a lot of jurisdictions were saying crypto assets were personal property New Zealand included. I think there was some case law in the UK and some case law in the in America as well.

And the judges had started to form this conclusion. So the Cryptopia hack, liquidators are appointed and then the liquidators need to have certainty about how they were gonna deal with the crypto assets that came to their possession. So they wanted clarification on what was the nature of those assets. So that was a Cryptopia end case, and, and, and they worked through it quite extensively, concluded that crypto assets were a personal property and they went through the test under the company's act.

It's got identifiable subject matter. Third parties can see it, identify it, you could move it around on the blockchain. So assumption by third parties. And, and there was this permanence in stability. And again, that came through the presence of of the blockchain. There'd been some previous case law about digital files, CV images, and all of that stuff being property.

So the the progression of it all was that that crypto assets were considered to be an intangible type of personal property. Basically every jurisdiction in the world looks at it similarly. So New Zealand aren't isolated in that. Obviously we're all aware countries like El Salvador are picking up crypto assets, or Bitcoin, I should say, as a national currency.

I think there might be a a Caribbean island that's got a crypto asset of its own. And many countries are looking at these central bank digital currencies and, and how they're gonna implement in them into their regimes. So just the, the starting places that crypto crypto assets are a type of intangible personal property.

People have said to IRD that's just convenient that you choose that, but, we haven't chosen it. We're just trying to apply con law and concepts to our act. New Zealand, IRD I should say, have no ability to say that crypto assets a currency that's kind of more a reserve bank area and, and currency and, and all the concept of money things.

And the Reserve Bank put out a discussion paper late last year, and I think IRD just needs to be in a place where we can react to the innovations or the movements and the classification of crypto assets in the marketplace. So the starting point is that crypto assets are an intangible type of personal property.

So we go to the next slide, please.

Andrew Evison: All right, so the, this is just a table and it's sort of capturing where the personal properties taxed and the income tax act. So Cs, part Cs, the income concepts, the CB through to CB 1 through to CB 5 is, is personal property sections. CB 1 2 and CB 5 are all dealing with, with business concepts.

And, and then in, in this context is what is a crypto asset business activity. So if someone is in a crypto asset business. Buying, disposing. That's their activity. That's how they make money, that's how they live. But these sections apply to tax that as a business. So things that you'd look at in terms of, of this are the number of transactions, the time spent, continuous time, and other sources of income that a person might have for their lifestyle.

And, and these tests are nothing different than the normal grieve principles that were established many years ago. I think in the eighties when I first started working in tax, the grieve case came out. So those concepts about what is a crypto asset business are just embedded in what is a business, generally speaking.

Of course mining could be a business. In the early days, you know, people could mine on their laptops in the evening or night. That might not have been a business. But these days, I guess in the Bitcoin sense, if you're mining, you're in business, because you've got a serious capital introduced for the equipment and, and the power consumption. So mining would be business. Of course, there's a lot of other crypto assets that can be mined as well.

The next block down is, is CB 3 and that's a, a crypto asset profit making scheme or undertaking. So this isn't a business, but it's a, a business like activity. People have a plan and that plan is to make profit.

IRD, our view on CB 3 it sort of, it duplicates CB 4. Analysis of it would, because as part of that profit making scheme or undertaking, it would have to be the disposal purpose. And, and where disposal is part of a profit making undertaking or scheme, we, we've got the next block down and that's section CB 4.

And, and this is where we think most people need to understand how the section works in terms of their crypto asset activity. And, and what CB 4 says, if you acquire personal property for the purpose of disposal, and that's really important. So if you acquire something for the purpose of disposal, then there's a tax issue that flows from that acquisition when, when it's ultimately disposed.

So putting that in the crypto asset context is as if you acquire crypto assets for the purpose of disposal when you dispose of it. That disposal amount is, is income for the purposes of, of your crypto asset activity. So, so that's, it's really important that that purpose of acquisition is understood.

Bitcoin is, as everyone here will know, it's, it's kind of, doesn't have a lot of other utility other than disposal. So it's not like you can do much with it. Other than that, it's, we've seen Rachael's mentioned the, the progression of different types of crypto assets that can start to generate income streams from holding, Bitcoin certainly doesn't have that.

So that's kind of where, where we start to look at these things is what else can you do with the asset? And a lot of our thinking around the application of, of CB 4 is, is all, so the, the public statements that the commissioner made in respect to taxation of gold. So those are the building blocks and these are the sections that apply for crypto asset in terms of your buying and your disposing of it.

And then if we could just move on to the next section slide, I should say. Sorry.

Andrew Evison: So the, the disposal is quite an important concept to the taxing framework for crypto assets. And disposal is very wide, lot of case law on this. So selling your crypto assets for fiat, that is a, a disposal and that's, I think everyone can see that that's an obvious one.

And then exchanging crypto assets for another. And this is where over time it's taken people. It's taken time, I should say, for people to fully understand or grapple with this. Initially, people saying, well, I haven't got my fiat, I haven't got my New Zealand dollars, haven't got my US dollars. How could I have a disposal?

But exchanging crypto assets is just, it is a, a disposal, it's a barter type transaction. If you analogize it with other types of investment like shares, you might have shares in Air New Zealand. And then you want to move your shares from Air New Zealand to another company. So you sell your Air New Zealand shares, you get your cash, and then you use that money to buy Fisher and Paykel shares or whatever it is that you want to buy. There's a clear disposal of Air New Zealand. There's a clear, clear, clear purchase of Fisher and Paykel. Crypto asset domain that innovations in it enable you to go straight from Air New Zealand to Fisher and Paykel. So that, that's just a barter type of transaction.

Using crypto assets to pay for goods -so I suppose initially when crypto asset was introduced after Bitcoin, after the GFC, part of the landscape was, this is a new financial system. You can keep your assets closer to you, keep control, keep security of your financial assets, but you could also use them for buying goods and services, and I think, I can't remember the exact date, the guy that bought a pizza. So you spend 10,000 Bitcoin to buy two pizzas or something like that. Crazy story. I mean, the guy that received 10,000 Bitcoin will be, now I wonder what he did with them.

But, but that using your Bitcoin to pay for goods is a disposal because you've actually bartered again, you've not got possession of your crypto asset anymore, and you've got some other goods or services as a consequence of that. What we are hearing is that people are saying to us, why would you, why would you spend your crypto assets? They, they kind of feel they're gonna go up in value. Giving away crypto assets is also a disposal. Haven't, we haven't put a lot of time in that.

Just the bottom bit there is like moving your crypto assets from one wallet that you hold to another wallet that you hold. That's not a disposal. You're just moving that, that asset from one place to another. So that's just the distinction there. So just disposal includes a lot of things when we looked at this, putting your bank money in your bank account, that is actually a disposal under common law and, and case law. So it is, it is a very wide term, that disposal concept.

Andrew Evison: So we could just move on please Kevin. Income streams. So the evolution of crypto assets from just being your Bitcoin, your Ethereum and altcoins and, and moving into all sorts of things. I think, I don't know, the latest number is 30,000 crypto assets, so it's a crazy sort of domain.

But there is the ability to earn income, an income stream from those crypto assets. And, and there's a slide later on where we kind of show some of the stuff we've been told about. But you know, it could be staking, it could be putting money into a liquidity pool. It could be yield farming. But it's kind of like you, you've put your, your assets into a place and you're earning income from it.

And, and maybe people use a analogy of, of interest as that. But, but generally speaking, that return that you receive is income under ordinary concept. So it's not under the personal property rules, it's just under the normal concepts of what income is. So CA 1 stuff, so you get some return for your money, you've put into the liquidity pool, that's income.

Got a slide coming up that we discussed this in a little bit more detail, but just because you get an income stream, it doesn't mean that the disposal isn't taxed. And that's where that purpose of acquisition is a really important thing. Actually, it's here, that slide I was referring to, sorry. And, and how IRD see this is, is it's your dominant purpose of acquisition that's really important to, to hone in on.

So, so if you've purchased it for multiple reasons, to, to earn an income stream and also dispose in the future. So they're two different sort of purposes. The tax law is triggered by what your dominant purpose of acquisition might be. And, and we've tried to put some sort of tests in place around this and, and what we hear from people is, yeah, I purchased it to the income stream.

Okay, yeah, that's cool. How are you gonna make money from it? I was gonna make money from disposing of it, so but, but so you, you agree you should pay tax? No, no, no. I bought it to get an income stream. So we kind of get those circular sorts of comments from people. But what we would think is an important thing to do is, is how do you expect to get a return from, from the acquisition of that purchase?

You've gotta be able to get an income stream from it, from the start. So those other types of staking income need to be available for that particular type of crypto asset to be able to say this and, and then we kind of expect people to analyze how they're gonna get a return is, is, is their return, is is it 7% from staking? Is that what they believe they'll get? And then they compare that to what they might get from disposal.

So it's just sort of that research and analyst that they undertake at that time of acquisition. Types of the forecasting that they undertake and ultimately how that purchase decision was made. So it's really important to think about that and, and, and, and not just think, oh, that's the answer, because that's the best for tax. It's actually the best, it is your dominant purpose for just purchase, acquiring the crypto assets that's really vital at, at this point.

And then it's like what actually happened? Did you actually do what you said you were gonna do in respect of that crypto asset acquisition? So you might see someone that's right into staking and, and they do a lot of research on, on staking coins and, and the best ones and the ones they want to follow up on. And, and they purchase those staking coins and they analyse their yield and then they might move from one crypto asset to another one because they believe they'll get a better yield on, on that other crypto asset from the staking or income stream activity. So that's the sort of analysis we would kind of like to expect to see if, if they were absolutely into the income stream sort of area in terms of the crypto asset being the dominant purpose of acquisition.

So, so that's just kind of trying to bit of... provide a bit of feedback in terms of that. So that's that slide.. We could move to the next slide please, Kevin.

Andrew Evison: So this is just a good time to dive into our website. This is what it looks like on the landing board. Previously we had a lovely scene of Bethels there. I don't know where this one is, so eventually I'll, I'll find out, but it's pretty cool. But here I've just put a, there's a couple of examples of purpose that we have in our, our website and I think the construction of our crypto asset material. We've tried to put examples through that as much as we possibly can.

And that kind of like, people can read the examples and think, oh, yeah, yeah, that's, that's me, that's what I'm doing. What does, what does the answer say? And, and take it from there. We, we just thought that's a, a better and more practical way to engage with, with people in this area. We do receive criticism that our examples are too simplistic and don't take into account everyone's situation. And, and that's probably fair. There's not much we we can do about that.

And equally our examples don't really go to the controversial end of things. And, and we are a bit cautious about that too. But there are other options available to customers. We do have a short process ruling process where you can come in and ask us what we think and there are de minimis amounts for that short process ruling, or alternatively, someone could apply for a binding ruling in terms of, of what they're doing and, and what we think and, and that sort of thing.

So whilst our, our guidelines on the website are, are general, you can get quite specific guidance on your actual transactions if you apply for a short process ruling or a binding ruling. We're starting to get more and more on crypto assets and, and we welcome that because that enables us to sit back and really think about things and spend time on them.

So just these two examples here. You can go and have a look for yourself at a later date, but, but Pete just earns passive income. But he plans to sell his crypto assets in the future. So what what appealed him to these particular acquisitions was the ability to derive passive income whilst he held them, but ultimately his, his plan was to, to dispose when, when the price went up.

So, and I mean, I think it's fairly easy to say that Pete, Pete still got a dominant purpose of disposal at that acquisition. So, IRD would say that he still has a tax obligation in respect of that disposal. So Selena takes it a little bit further and, and She's done a bit of crypto asset activity, but the volatility of the price has made her quite nervous.

So she, she, the passive income stream appeals to her but she doesn't want to be exposed to the volatility of price. So she, she has invested in, in a stable coin. Stable coins attach their value to another asset, for example, US dollar, obviously. And, and therefore the volatility of price isn't, isn't as significant.

So in that situation, the, the volatility or the gain on the disposal is, is not Celina's driver. She, she just wants to get a steady income flow. She's done her analysis, she's chosen her coins based on that and, and a significant gain at the disposal wasn't a driver. So, so in that kind of case, we'd sort of accept that potentially there was not a dominant purpose of disposal.

What with these examples we have, if you kind of read them and you'd like to know more we are happy to discuss those with you on our website. We do have an email box link, I think it's called Cryptocurrency@IRD.govt.nz, but those come through to me and sort of happy to talk through or work through issues. They might come into that mailbox.

So I, I think just generally speaking, the guidelines are general. But if you've got specific areas that you'd like to canvas us on, we're happy to do that. Just move into the next slide, please.

Andrew Evison: All right. So this is just income and expenses more, more the calculation sort of once you've settled in your activity and what your taxation obligations are in respect of it.

So obviously income arises from, from your disposal of crypto assets. And then that would match off against your costs and your transaction fees of purchasing them. And, and it applies to parts of disposals as well. So you might buy a Bitcoin and sell a portion of a Bitcoin. So the portion's tax income when it's that portion's disposed, and the allocation of the portion of that cost on that initial purchase is, is a cost that can be deducted at that point as income streams.

So the ability to derive earnings from, from crypto assets. So we are aware of a number of people in New Zealand that are getting paid maybe from an offshore employer in crypto assets or, or they're contracting to offshore enterprises and they get paid in crypto assets. And, and again, there are a few New Zealand employers that are paying offhsore employees in crypto assets too.

So those are income streams. If you're earning your income in crypto assets. So that would be an income stream. One of the questions that came through was if you venture crypto assets or your income stream was paid in crypto assets and you're holding those crypto assets. Are there any further tax issues?

And, and, and there are. So ultimately, when those crypto assets that you've earned as income are disposed of, there's gonna be another income recognition point at that time. And the cost of that income or the cost of the crypto assets, I suppose, would be the amount of income that arises at the time that it was first recognized as an income stream.

So it is just a bit tricky if you're getting paid in crypto. You've just got to understand that there's a couple of income recognition points that does make compliance a bit harder. We understand that. And, and, and we are just trying to work through the historical legislation in, in that sense.

Obviously mining income, it's a service. You're providing a service to the blockchain. So the rewards you get for that service are income. And then it's just the, the expenses that can be deducted. It's, it's in the transaction fees, the cost of the crypto assets. If you've bought some equipment, some computers your depreciation, normal depreciation is allowed on that.

People have entered into borrowing to purchase crypto assets. So the interest that they incur on that borrowing, obviously it is a deductible thing. And then other expenses that relate to the earning of that crypto asset income are deductible. In respect of income, there are tools in the marketplace and, and IRD aren't, it's not our business to endorse those tools specifically, but we kind of encourage people to use a tool to have a look around, find a tool that you think might be useful because those tools actually are really useful for capturing people's activities.

You know, Some of the stuff we're starting to see in terms of people's activities are vast. They've kind of got hundreds of crypto assets and how they keep tab of that is, it's very tricky from our perspective to understand. So some of the tools that can be used for capturing portfolios are we, we think are really useful.

And I think they, they save a lot of headaches for people too and it sort of helps with that record keeping requirement as well. So the tools that are in the marketplace do a bit of research, have a bit of a look around. We, we've spent time with some of them trying to get our head around them, making sure we are comfortable with them.

So when, when we can see a customer using those, those income calculation tools, we know, know where to start with, with the next steps in that calculation. So that's, that's crypto asset income. If we could just move to the next slide please.

Andrew Evison: Losses. Yeah. Okay. We, we talked about losses. And losses can arise from a number of, of, of transactions or things.

First of all is if you dispose of crypto assets, you purchased them in the heady days, you got onto the hype, but then you've got a bit nervous and you sold them. If your purpose of acquiring those crypto assets was disposal and you realized a loss and it has to be a realized loss, then that loss is available to you for tax.

What we started to see this time last year was a lot of people were trying to claim losses for unrealized losses. The value of their holdings had gone down and they wanted to claim that unrealized loss in the tax. You certainly cannot claim unrealized losses. This just has to be a realized loss.

Crypto assets can be stolen or, or can be part of a scam. So the, the thing here is that there's different ways that people seem to be suffering these losses. If they're a crypto asset and if they have a crypto asset activity and as part of that activity they lose possession or, or they have crypto assets stolen and those crypto assets were purchased for, for the purpose of disposal, then they would come into losses.

Other types of scams where people don't purchase crypto assets, they might think they're purchasing crypto assets or crypto assets as part of a, a wider type of scam. It's, it's less certain that there's a deductibility available to them. The two slides here FTX and Celsius. We are aware that New Zealanders have suffered losses in both of these platforms.

FTX being a custodial exchange, stuff goes on, can't get their assets back. Have they got a loss? Most likely they are gonna suffer a loss to the extent they never get their crypto assets back. A loss deduction for that loss is available. How we kind of see that is, as both Celsius and FTX have entered in what the US call chapter 11.

And we're not experts on the chapter 11 process, but we have done a bit of look, bit of a look at it and how we think tax works with that. And, and we think under the chapter 11 processes are, you know, everything's on pause. Can this entity trade out a plan for the futures determined and then the court has to approve that plan and that plan being approved by the court will kind of have a good summary of where the enterprise is, and it's at that point, we kind of think that people will know what they can expect to get back, if anything, from their holdings gone into FTX Celsius and other. So in, in that sense, once there's clear indications that they're not gonna get their hundred Bitcoin back or whatever it is, they might only be getting 10 back then, then the deduction most likely for that 90 could be available once that plan's signed off by the court in the chapter 11 process.

That's how we see that. And again, we are happy to discuss with, with specific situations, discuss with people specific situations. The one that gives, makes us quite nervous is this loss of private keys. You know, if someone who is no longer able to access their crypto assets, they've lost their ability to access it, is just gone into the, the crypto asset black hole.

I think it's been reported that that could be 20% of, of bitcoins tied up that way. So, so if you're no longer able to possess your crypto assets, is that there's the ability to claim a loss. But the thing that makes IRD nervous obviously is if you, you know, we can see it on the blockchain it's sitting in that place, but who's to say two or three years later those aren't accessed by the person. Either they find their keys or whatever. So strictly speaking, if you lose access to your crypto assets permanently, there's a loss available there. But, but to be honest, it doesn't, there's something that makes us quite nervous. So that, that's losses.

Andrew Evison: Moving on again, and we're getting towards the end of what I'm gonna talk about today.

So Something that, that, Rachael mentioned this evolution of crypto asset and, and we've kind of loosely umbrellaed it into something called defi. I think strictly speaking, a lot of what we kind of look under this umbrella might not strictly speaking be defi itself, but it's just a concept that we are just trying to work through and understand.

So, so when we first started to look at this, people were telling us all about it, but it was actually really hard to understand what, what this actually meant. So along the way someone was really quite good to give us this example, and this is a complex example, of, of what goes on. But it just enabled us to have a look, okay, what are the steps to these things?

What are we actually talking to it? How do we kind of break this down and then we can grapple with the tax rules as they are that work through this. So if you look at the start, you've got one Bitcoin, 10, 10 Ethereum, and you move through step one, you're at your Bitcoin, then you put your Eth and you wrap Bitcoin in a liquidity pool, and you put that into a yield farm.

You get rewards, dispose of the rewards, exit the yield farm, redeem your liquidity pool tokens. So I'm just saying this really quickly because you can see that all there, but the problem with our tax law, Is that there are a lot of disposals along the way and that makes compliance with these types of transactions really problematic.

So we haven't been got to the place we're able to put guidelines on our website with this because we haven't gotten a complete answer to this yet. But that is something that is work in progress for us. And, and something that we kind of are very conscious of is having stuff on our website that is compliable with, it's all very well saying, oh, there's lots of disposals, and then not helping people with the next step.

Or what does that actually mean? What, what do I do for compliance? So that's something when we kind of look at these things where we wanna be able to provide solutions, not just create more problems. So that, that's an important concept that we can keep. Around this also, IRD hasn't got endless resources, so we have to prioritize the way we use our resources.

So it's also a question of, well, how many people are doing these types of things in the New Zealand domain? And, and our, our kind of inquiries sort of suggest that around about 5% of the crypto asset domain in New Zealand are participating in these types of transactions. And what we get told is there are some people that are very hardcore.

This is what they do, they're passionate about it, but there's others that just dabble it and they might have tried it once or twice. So it's just kind of trying to get an understanding of that so that we can know that this is an important place to put some resources into. So so that's the, the defi bit there.

So it is complex. UK have tried to put some guidelines up on their website and, and they're doing a lot of work on that. And I think Norway have got some stuff up there as well. So we just went through that. So that, that's it for me. I guess there might be a bunch of questions that come through and we are just happy to pick them up in the questions and answers at the end, so over, over to you now Will.

Will Edmonds: Alright. Hi everyone. So my name is Will I work in, Inland Revenue's tax policy area. And I've been responsible for some changes to tax legislation affecting crypto assets recently such as excluding crypto from GST and the FA rules.

In terms of my background, I started dabbling a little bit in crypto in 2017. I actually had a friend who had some Bitcoin and he gave me some you know, and, and tried to get me interested in it. And initially I wasn't, but then I saw it started skyrocketing value. So I got into crypto bought myself a, a Ledger Nano S, and you know, did a little bit of vesting.

But anyway I'm here today to talk to you and give you a bit of an overview about what's on the radar for crypto from a tax policy perspective. And I think this should be helpful for businesses just in terms of providing them with a little bit of certainty as to, you know, where we are headed from, like a law change perspective.

So just a little bit of introductory stuff. So, so what is tax policy just in, in case you're not aware. So essentially we advise ministers on proposed changes to tax laws. So basically all changes to tax legislation are developed through our policy unit. And then they're consulted on publicly and, and go through the legislative process.

And, and we are responsible for that conjoint with treasury. And what we, what we work on is governed by the tax policy work program. So this documents, it outlines the government's priorities for tax policy and anything that's on that document that, that work program that represents what is actually going to be advanced over the term of the work program.

And this is usually 18 months and it's kind of set, you know, based on the government's revenue strategy and that, and that feeds in from the economic and fiscal strategies. And it just basically, In accordance with the objectives they have for the tax system. So I think that's helpful for businesses.

You know, you can, you can find our work program, it's online. If something's not on it, generally we're not going to work on it. And that's either directly or indirectly, because there are some broad umbrella categories on, on the work program that allow us to work on, on, on certain things such as, you know, the maintenance of the tax system, for example.

Will Edmonds: So specifically tax related changes that affect crypto assets. So just our, our broad policy approach. So, you know, we understand that crypto is not plug and play. You know, in the sense that crypto assets do not fit into existing categories of law. You know, you think the law of shares or securities, all that sort of stuff, you know, it's been around before, crypto assets, you know, were even contemplated.

And, and they don't fit into these categories neatly. So, you know, a crypto asset may be deemed to be a share. But, you know, if it doesn't provide an interest in a, in a foreign company like a typical share, it would be taxed very differently. You know, the share would be subject to the, the fifth rules.

So our, our general policy approach, you know, keeping all of that in mind is when we're looking at tax changes to crypto assets, is we want to ensure they have a neutral tax treatment. So this means, you know, we don't want to stifle innovation by having tax settings that treat crypto assets, you know, way more harshly than comparable assets.

But by the same token, you know, we don't want to provide concessionary treatment. And I think a question had come in asking whether we would exempt crypto assets that are under a thousand dollars you know, those transactions from tax and no, we definitely wouldn't do that. You know, we've got a general de minimis that if you earn $200 of other income you need to return it.

And that doesn't matter where that's derived from. So our approach, you know, keeping those general principles in mind has rather been kind of like a wait and see approach. You know, we want to, you know, this is a very fastly growing area. Crypto's always changing, so we, we don't want to jump into legislate until we really understand, you know, the policy problem.

So, so looking at what's actually on the slide here the first changes that we made in relation to crypto assets were enacted in the 21/22 tax bill, and they were retrospective back to 2009 1 January. So when, when Bitcoin was created. So the first off with GST, so previously crypto assets could receive, you know, an uncertain and variable GST treatment.

And that made, you know, using crypto assets less attractive than other assets. So the, the GST treatment could really depend, you know, on the facts. You know, the feature of the crypto assets or, or the residency of the buyer or seller. And obviously as you know, it's, it's very hard to determine residency of a counterparty to a transaction in crypto. It's all, all quite anonymous.

So, so the supply of a crypto asset under old law, you know, it could be an exempt financial service, you know, subject to the standard rate of gst, 15%. Is error rated supply to a non-resident. So all of this, you know, it's quite confusing for businesses. There's also scenarios where double tax could arise.

So, if I'm a car dealer, I, I sell a car and the person purchases it with Bitcoin, I'm going to pay GST on the sale of the vehicle. And then, if I was to dispose the crypto asset, you know, I'd be paying GST again. So, so we really wanted to make sure that it's easier for people to buy and sell crypto and ensure that investors were not disadvantaged from, you know, their businesses, maybe ICOs or selling tokens, et cetera.

So, so basically what we did was we excluded crypto assets from GST. So suppliers of crypto assets themselves, they do not attract GST in New Zealand. But the important point is that GST continues to apply to supplies of goods and services that are bought with crypto assets and to related activities.

So if I was to go and buy a tv with crypto, obviously that's going to be subject to GST. And related services such as mining are, are still in the GST net. In practice, you know, if you have a mining syndicate if you're part of a mining syndicate that's gonna be most likely located offshore.

So you'll be able to claim all your input tax for your complicated computer system to set that up. But you know, the supply of mining services would be an export, so it'd be a zero rated supply. So you won't account for output tax there. But yeah, so long story short, crypto are excluded from GST, but related activities such as you know, supply of goods and services bought with those assets, that's, that's still on the GST base.

We also, you know, in recognition of the fact that we don't want to disadvantage businesses that are creating a crypto asset product, we still allow input credits for capital raising. So if you were to do an ICO in New Zealand and you had lawyers fees, you know, related to setting up a white paper, for example you, you can claim the GST back on that.

NFTs they remain subject to GST. So if you buy and sell NFTs, ordinary GST rules apply. And that's consistent with, you know, other digital products, collectibles, intellectual property rights. They're, they're all subject to, to GST. So that's GST. Also on that slide the financial arrangement rules I'll go go through this quickly cause I understand we're, we're going over time.

But essentially, the financial arrangement rules are a set of rules that require income tax to be paid on the arrangement as it accrues using a spreading method as opposed to, you know, taxing on a realization basis. So applying these rules to crypto would result in a accrual based taxation on large unrealized gains and losses in a, in a volatile market.

So, you know, your crypto's gone up or down, but you haven't actually disposed of it. And you have, you know, a tax bill. You know that, that that's not an ideal position to be in. So we've excluded crypto from these. So that's what we've done so far, just in a nutshell. Moving on to the next slide. This is just what we've got upcoming.

Will Edmonds: So the Crypto Asset Reporting Framework. So this is an OECD developed initiative and it provides for the collection and automatic exchange of information on crypto assets. So the, the purpose behind this is we really want to improve the visibility that tax authorities have over incomes, over income that's earned through crypto assets.

So I think about 80% of New Zealander's crypto asset activity is undertaken through offshore crypto asset exchanges. So, you know, we really want to have visibility over this so that we can ensure people pay tax and, and don't conceal their income. So under the CARF, which is the Crypto Asset reporting framework intermediaries such as, you know, crypto asset exchanges will actually be required to provide tax authorities with income information in respect of their users.

And, and that information is exchanged between jurisdictions to the extent it relates to persons resident in that jurisdiction. So, you know, there was a crypto asset exchange that says, based in the Netherlands, and the Netherlands have signed up to the OECD info exchange. You know, any transactions that relate to New Zealanders that are using that exchange that will come through to us and we will be able to make sure they comply with their tax obligations.

And this will cover all sorts of things. So crypto to crypto transactions, crypto to fiat any transfers, you know, to wallet addresses, for example. So yeah, we've, we've released a consultation document on this. It was a targeted consultation with the exchanges just to see what, what their views were on it.

And, and, you know, this is something that we've looked to enact over the next couple of years. It's really in line with what the OECD are doing. And, and they're still working on the implementation package. But yeah. Next slide.

Will Edmonds: So future and emerging issues. So at the moment, you know, as I, as I mentioned earlier, we have a tax policy work program. Currently we don't have anything else that's explicitly on the work program. But you know, as I say, that's refreshed every 18 months. We'll be getting a new work program soon. And, and one thing that we are really keen on doing is advancing a project to clarify or simplify income tax obligations and, and record keeping requirements.

So, as Andrew has mentioned, you know, crypto are taxed on a realization basis in New Zealand. So you get the scenario where someone may have very small holdings, you know, $5-600, but they've done a huge amount of transactions and you know, the fees that they may pay to their accountant to unwind all of that, work out their tax position at the end of the year, you know, it's disproportionate to the income.

And, and so we recognize really that taxing on disposal can be complex. So the things that we'd be looking at in the sort of project are, are twofold. So one would be software tools you know, how that can be integrated to make it easier for people in terms of assisting with record keeping and, you know, other compliance costs.

And secondly we may develop a more simpler annual tax calculation method. So, you know rather than taxing on a realization basis, we could look at the starting value and, and end value of the portfolio. And of course this would need to, to be consulted on. But that's something that we'd like to look at.

Other stuff, you know, and I think Rachael may touch on this a little bit that we may need to be aware of is obviously CBDCs. So the Reserve Bank have released a consultation on the place of Central Bank Digital Currencies. So obviously if we ended up with a CBDC, there would be tax implications.

As Andrew mentioned, crypto is, it's currently a form of intangible personal property, but a CBDC would be currency or money. So it would need to be treated differently. So there'll be issues we need to work through there. And then you know, we also kind of keep a watching brief over what's going forward in the future.

You know, just like with a digital economy there's no physical presence or, or permanent establishment required to derive income in the virtual economy. And, and we know, you know, the metaverse is starting to take off. And there'd be a whole, whole host of issues here in terms of, you know, just with GST for example, in the future, you know, we might need to look at value creation and, and place of consumption. And then, you know, with income tax, how, how are taxing rights going to be shared going, going forward? And I, I think that would probably be, you know, a global effort. Many different countries will have an interest in that. And, and maybe that's something that would be considered more globally at a future date and, and we would be able to contribute to that.

And, and just in terms of you know, weaving in some of the questions cause I know someone had asked in terms of, you know, from a policy perspective in the future, would we look at operating an anonym anonymization pool? No. No, we wouldn't. So, as you know, our tax system operates by way of a self-assessment regime.

You know, you're required to declare your income and return it. And you know, if we were to use information demand powers to request transaction data, say from your ledger, for example, that that would not be anonymized. I don't work in compliance, but I understand, you know, IR has access to a lot of commercially sensitive and private information.

And, you know, we have secure systems and, and we'll deal with that information for tax purposes. And, and coming back to my earlier point, you know, crypto assets are no different. You know, we want to provide a neutral tax treatment. So, so from a policy perspective, really there's no intention to have special rules for crypto asset users, you know, to provide them with, with an anonymization tool or, or something similar.

But yeah, I mean, that's, that's where we're at from a policy perspective in terms of, you know, what we've done and, and, and, and where we're heading in the future. So I'll, I'll pass on to you now, Rachael. Thank you.

Rachael Gemming: Thanks Will and Andrew earlier. I've got some additional comments to make just before we pop onto my wrap up slide, and then we'll go into questions. Because I, I'd intended to cover off some of the more unsettled issues and, and maybe comment on some of the things that the IR team have shared so far.

It might be Kevin and Callaghan team. We might need to do a second session, another webinar maybe on some of these, the emerging issues, the evolution. But I, I think it's fair to say defi is, is particularly interesting. There's not a settled view on I guess the key question on what transactions trigger a disposal, particularly around smart contracts when they are non-custodial you can't have a disposal to yourself.

IR have said earlier that moving from one wallet to another doesn't trigger a disposal. I think these things are, are emerging. You're gonna get clarity sometime, but at the moment, I guess it's just getting a shared language and shared understanding.

What is a smart contract? I mean, the name isn't really helpful, they're not really smart, they're not really contracts, but how you program business rules or, you know, asking people to trust in the code is really important that we all understand how they work.

So I think when we talk to IR or advisors, we do have to get quite deep and technical. This is where we, we need you as we Web3 founders to talk to us, to explain how these things work, how we can unpack the transactions. Because effectively in defi now you can be your own bank, you can have your own savings you can do borrowing, lending, you can use collateral.

All these things are quite new and they're not, they're not covered off. We don't have an agreed position. It's something that I'm hopeful for. So maybe in, in a futures seminar we could, we could socialize the, the combined views. But yeah, just getting a shared language, right? We've tried to get some analogies.

Term deposit doesn't seem to work. You know, a pawn shop, if you are looking at some old case law on staking that, that could apply a vending machine, right? Putting in one thing in another. These things don't readily liken themselves to crypto and one of the pre-prepared questions was around impermanent loss and automated market makers.

And I think you can't answer that question without first looking at that liquidity pool and how you're participating in it and how the smart contract work, but arguably you, you have suffered loss. But to Andrew's point to qualify, is it a, is it a realized loss if you are taking out less units of crypto. Potentially.

So that's one I think that, that we need to circle back to. It's, it's not settled yet. I, I would say we agree that if you do dispose of revenue account property, it's likely to be taxable. But the questions around is it revenue account in the first place aren't always settled. And that piece on dominant purpose that Andrew mentioned is really complicated. Lots of purposes.

And things are evolving. You know, Bitcoin used to be pretty, pretty simple, but now, you know, you can use it for collateral. NFT Ordinals is, is a new thing. So, you know, what does that look like and are people participating for that reason? Those things, we're gonna see more and more different use cases evolve.

So yeah, I just wanted to share that. It's, it's a movable feast NFTs are actually really interesting. They can be property in and of themselves but also NFTs can tokenize a real world asset. So the piece policy piece that we mentioned earlier around GST, still applying for NFTs. My personal view is that's, that's likely to be because NFTs originally were seen as art.

You know, I think you had a crypto punk up, up there earlier, or an ape. So as they move on from art, as NFTs evolve into different uses and start to be seen more as a financial instrument or a derivative, then the GST policy settings will need to be looked at. That's that work program piece Will mentioned.

So yeah, I, I think things will change. Maybe another time we talk about some of the challenges around sourcing the traditional source rules around cryptocurrency, tax residents, transitional tax residents, moving countries, global mobility, moving with crypto or an open contract, the financial arrangement rules.

There's probably a whole lot more exciting crypto technical stuff that we could get into, so maybe for another day. One of the earlier questions was on DAOs as well. I think DAOs deserve a decentralized autonomous organizations deserve a, a slide of their own. So that's one for another day. But I would say that they're exciting and probably challenging for our tax system because our tax system's built around entity taxation.

We look at entity types and how the rules apply. What kind of entity is a DAO, if it's, if it's community led. So it doesn't, as you can see, some of these new concepts don't fit neatly into our traditional boxes. There's a few more unsettled items. I like how you mentioned, Will, around central bank digital currencies and stable coins as well.

Stable coins, some are pegged, some are unpegged, some are algorithmic. All these things need to, need to get certainty and agreed approaches on, and I think that's, you know, I'm being open. There's a whole lot of things that we're in discussion around now with IR and, and with our clients just trying to apply some of these old school legal concepts to the new technology.

Rachael Gemming: Maybe we'll just pop onto the last slide then, Kevin, and then we'll jump into questions. It's not all about risks and it's not all about when you are taxed or not taxed. I think there's a broader play for Web3 founders to just think about. I mentioned in an intro that got the option and, and I think IR are seeing this paying employees, I think care needs to be taken if you are using tokenized incentives.

But they're a valid choice, right, that you need to navigate. R & D incentives. I had to slip this in because the Callaghan team are involved in the R & D program, but IR also administer part of it, so that's really important. If you're building out something in blockchain, arguably you've got some, something with uncertainty and technical challenges that might be worth a chat.

I know software specialists look into blockchain and are you, are you doing things with Oracles? Are you doing things with basically in the Web3 area, there's a distinct lack of public information. So, you know, potentially there's an option there worth talking to someone to see if there's, if there's some support you could get from the Callaghan team in terms of incentives.

Global structuring and transfer pricing, that's really important for founders. My favorite kind of clients are the ones that have global ambitions and that, you know, Kiwi companies are famous for this. And if you have plans to scale and go overseas, you, you can apply some of the traditional thinking around how you should structure your setup and where you should go and how you can maximize value for stakeholders.

But once you introduce tokens into the mix, then you have to think about different jurisdictions, royalties, withholding tax. If you've got things happening in the metaverse, arguably it gets more complicated. So just a, just something to think about. Plan ahead.

And then finally, the options for navigating uncertainty. Yeah. If you had certainty on your tax, would that be a benefit to your business? Could it help you sleep better at night? Or, or get investment or just take care of something so that it's not a big problem later. Andrew mentioned short form rulings, that's an option. But yeah, certainly talking to IR or talking to an advisor I feel like it's a bit like dating when you meet new clients or prospective clients and you need to share what you are doing and what your problems are and you almost need to match-make, and find someone who can help you, who specializes.

I know there's different advisors. There's even some that joined today. Wonderful. Some that are ex IRD some that specialize in traders, others that specialize in enterprise businesses. But I think there's, in the post FTX world, you need trust and confidence in what you're doing. You need certainty for your customers, not just that you've got your tax right.

There's probably broader assurance pieces needed. So yeah, just think about the opportunities that come from dealing with your tax. I think there's plenty, but of course I would say that. Yeah. I just wanna say thank you for letting us share today. There's probably a lot more conversations we could have on this topic, but this at least is the 101.

And we can unpack some of the trickier things perhaps in the questions, or perhaps we bank them and prepare another presentation. Thanks, Kevin, back to you.

Kevin Whitmore: Thank you, Rachael. I am just going to pause there and kill the slideshow and we've just got a QR code here. I think this is still the one from the last learning series so bear with us.

But if you could scan that and fill out the form that really helps us structure these sessions. And it also allows us to understand what are the challenges you are... I've just made some notes on some of the topics that we haven't had time to cover off today, so we can potentially set those up for additional sessions, as Rachael said.

Really like to thank Rachael and Andrew and Will for, for today's talk. And now we are just going to jump into a Q and A session. If you do need to drop off, feel free. Right now is, is more of an optional an optional time. We've got about 15 minutes left and if we run out of time, then we can potentially do stuff offline as well. So feel free to come off mute or stick any question into the chat and we can start going through them. Otherwise I'll start asking questions like last time.

Kevin Whitmore: Maybe just to get the ball rolling. I think Andrew or Will, you mentioned the currency sorry, the money discussion and that, that sort of sat with the RBNZ in terms of their definition. What's, what's sort of the ongoing process there for the determining whether a crypto asset becomes a currency?

I mean, we mentioned, you mentioned previously that there was kind of a directive in their, I think it was their future of money paper that they released recently. Is there any more sort of formal settings for that or ongoing reviews of that process or what's, what's sort of the, the currency review process in terms of digital assets?

Andrew Evison: I can start that and maybe Will can chime in when it, when it's appropriate to, to do that. I, I guess when El Salvador announced they were gonna have Bitcoin as their national currency, we, we looked at it quite carefully and did quite a lot of research into it and, and ultimately we felt crypto assets were nowhere near a currency or money at that time.

And talked to the Reserve Bank and others as well. And I, I think you, you're probably aware there's an F was an FEC inquiry into the place of crypto assets in New Zealand that was commenced a few years ago. And, and IRD presented. Many people presented to that. And I, I think we're just waiting to see what happens with that and the, the government's direction with it.

And I think this whole thing's a, a New Zealand Inc thing, it's not a IRD thing, it's, it's, it's the New Zealand whole money crypto digital asset thing. And it, I think IRD just need to be part of that conversation so we understand where it's heading. To me, it's very complicated though. If you've got a central bank digital currency that might be currency, but you've got 30,000 crypto assets that aren't currency, that, that's kind of weird in my view.

So I, I just don't know how that's gonna progress in the future, but it's certainly, I think IRD have to have the be part of those conversations so we can understand what it means for us in the future. Anything to add to that Will?

Will Edmonds: Yeah. I mean, you know, we've defined cryptocurrency in the Income Tax Act and, and the, and the GST Act.

And obviously, you know, there's a, you know, secured cryptographically that sort of component. But there's also, you know, it's decentralized is another component. And I think, if we've got a central bank digital currency, I mean potentially it may not fall within that definition. And, and I think, it's meant to function as, as money you know, as, as legal tender.

You know, then that's a different conversation. We're going to need to carve that out cause it's not intangible personal property. At that point it's, you know, could, could end up being, you know, legal currency. I mean, I think. There's a lot that needs to be worked through first.

I know the, the Reserve Bank have released the consultation. And, and that's all about, you know, the future of money and where that's headed. And, and to be honest, you know, I, I haven't considered that in detail at all. You know, it's definitely future state, but there will definitely be tax implications coming out of that work.

But that's the Reserve Banks remit in terms of, you know what, what's, New Zealand currency and, and whether we go down that path and, and we'll very much need to react to that in terms of the tax settings depending where they land.

Kevin Whitmore: Awesome. Thank you.

Kevin Whitmore: And we've just got a question from Lawrence. Historically, government uses taxes to finance public goods. But if a DAO is specifically building public goods, should it be double taxed? So pay input, GST costs in each jurisdiction plus profits, or could it be zero rated?

Will Edmonds: I mean, as a general point, right? I mean, for GST you know, it's the destination principle. You think about where consumption occurs and, and that's, you know, where things are taxed. As a general policy position. I mean, I don't know the scenario in detail, but we want to avoid tax cascades where possible, you know, you don't want GST on GST.

So yeah, I mean, I think when you come back to general principles, I mean, if we were to ever consider something like that, you know, you're gonna look at, you know, where consumption occurs. And, and just general GST rules I mean, that's my perspective on it.

Kevin Whitmore: Cool. Thank you. Anything to add?

Andrew Evison: Nothing to add from me on there.

Kevin Whitmore: Anything Rachael? No. All good. Cool.

Jodi's just got a point to suggest re FAs and crypto assets. You there, Jodi?

Jodi Collinge: Yep. Can you hear me?

Kevin Whitmore: Yep.

Jodi Collinge: So yeah, I was just, it's probably more for Andrew, maybe in your crypto guidance. So since the crypto has been included as an excluded financial arrangement in the legislation, I've had conversations with a few accountants who deal in crypto.

So it's not like they're you know, not au fait with what's going on and lots of people are reading that as crypto assets are excluded from the financial arrangement rules and not getting that if you've got a crypto asset loan, that that is still a financial arrangement and you still need to consider the financial arrangement rules around that.

So I dunno whether it's something worth putting in your guidance that people are just reading that it's now excluded. And that's not necessarily the case.

That's me.

Andrew Evison: Thank, thank you for that, Jodi. I, I guess we, we have kind of started to look at a few crypto asset loan scenarios and they do vary. So, you know, the ability to use your Bitcoin as getting real currency loans on it. And then, then we kind of start to, what happens to the Bitcoin is it at a disposal and then that kind of got us into the tailspin of, of okay then what does that mean for that disposal? And, and things like that.

So that, that is something that is in our thinking. We haven't quite got a, a final position, but I fully take your point that just because something crypto is an EFA, that doesn't mean that everything that to do with crypto is not a financial arrangement. I think we might have a general comment on there, but maybe we just need to make that a bit clearer.

Jodi Collinge: Yeah. And just maybe the reasoning why, you know, when when we worked, we we always prayed that it would be an excepted financial arrangement because we didn't wanna have to do those calculations that you have to do on an overseas bank account and things like that. If you, if you became above the de minimis, we always thought that that would be a nightmare.

And that was kind of a lot of the thinking behind taking it out of the financial arrangement rules, not to take crypto assets, everything to do with them out.

Andrew Evison: Hmm. That's right. Yeah. They certainly can be part of a financial arrangement. And so Will maybe's got a bit more to add on that?

Will Edmonds: Yeah, I mean, from a policy perspective, we clarified that crypto assets that are economically equivalent to debt arrangements still remain subject to the FA rules.

You know, and obviously with, with a loan, you know, you've got a, a percentage return. So you know, that's, the return is known to the investor in advance, so they lend out their Bitcoin for 10% per annum. It makes sense that that's still subject to the financial arrangement rules and that's that we have included that in our tax information bulletin on the changes.

But perhaps, yeah, I mean maybe we could make that more explicit. Both in, maybe it wasn't explicit enough in our tax information bulletin on the changes and also the guidance on the website. So I think, yeah, maybe we can take that offline, Andrew, and we could update the website to make that point more explicitly clear.

Jodi Collinge: Thank you. Just wanna give you something to do.

Kevin Whitmore: Cool thanks, Jodi.

Rachael Gemming: I think the other issue around that, just on the accepted financial arrangements or financial arrangement rules, very technical, makes a lot of people's heads hurt, but we have shared lending rules that specifically were carved were created to carve out shared lending. But there's some technical difficulties around whether that's possible and there's some re policy reasons for that.

So the, the crypto version doesn't directly align with the, the share lending fix, but yeah, we have flagged that with IR and it's, I know it's something they're thinking about. So thanks for raising that, Jodi.

Kevin Whitmore: Just a question also around, so we're seeing a lot of activity now in the, I guess the, the tinkering space. So innovating at the early stage around things like open source Bitcoin ATMs POS systems that use open source software to, to use the lightning network and things like that. There's, we're noticing a lot of maybe not fear, but apprehension around what they might have built and what the tax implications are.

What would your suggestion be for people playing in this space that are doing innovative credit innovative things where they might not be confident a, about what they're rubbing up against in terms of tax implications and things like that. Do you have any advice to people playing in that space?

Andrew Evison: I, I think firstly it, it's, it's, it is new, it's exciting and we are aware of developers, of apps and, and trying to facilitate the use of crypto asset in the wider business domain. I think that's slow and I, we don't see a lot of it, but we are aware of a bit of it. And, and our, our first kind of piece of work is how, how does this work? What's going on? What does that mean in, in, in existing tax law? What, what does that do to these types of things?

So that's the first step, but then I think it's feeding through to Will in the policy area. And we've got another area at at IRD that's starting to look about the future of, of the crypto assets main Web3 stuff.

And, and, and the part of the mandate for that team is, is trying to make sure IRD is at least agile enough to be able to react in time to those types of innovations. And, and I, I think we don't have all the solutions or everything, but if, if things are going down a pathway we wanna make sure that the, the tax policy settings that we do have are able to be adjusted to, to do the things like all said, not to stifle innovation not to hold our economy back.

We don't want tax to be something that's, providing a or putting a brake on things. But it's something that unless we know how these things are evolving, we'll never be able to adjust. So it is really important that, that we kind of have got an open mind to what these things might make our financial systems, business systems look like in the five to 10 year framework.

Might be quicker, might be slower, but I think part of this group and the importance of it that you're putting up, Kevin, is that we can sit down and at least we, we, today we've talked about what we're seeing and what we think. But if a whole lot of discussions come through about, well, what if I did this? What will that mean?

It's really important that we have those discussions and, and the IRD are part of that discussion so that we can sort of understand firstly. And I mean, if, if we come aboard back and look at it and think this is terrible, maybe that we can talk directly to, Will talk through that. If it's absolutely having a significant impact or, or if it's just something that needs to be built into the way that tech works in the future, that's really useful too.

Kevin Whitmore: Awesome, thank you. Just conscious of time, so we might wrap it up there. In terms of keeping the dialogue going, obviously I think we've got some, some topics that will lend themselves to, to follow up sessions that we've identified, so it'd be great to, to do that in the future. How do we, how do we sort of stay in touch, obviously Andrew, you mentioned the, I think it was the cryptocurrency IRD email address. So, we'll, we'll share that for people that, that want to reach out.

In terms of staying on top of these topics and, and sort of the evolution of, of things as they evolve, is, what would your suggestion be around how we, how we refresh or stay in touch on some of these topic?

Andrew Evison: Well, it sounds like a follow up session might be a good thing.

You know, Rachael's pointed to a bunch of things. You know, the future, we don't have solutions to some of the things, many of the things Rachael talked about. So it's, it's, it's, it's something that for, for the future, but it's just keep keeping in contact that email address having conversations with us and and taking it from there.

We certainly are keen to hear, have conversations with people directly about their specific situations. And if they've got something that's gonna happen very quickly and they're really uncertain, there is the short process slash binding long process that might help.

What about from your end, Rachael? What would you kind of, as an advisor recommend to, to help people through these process these things?

Rachael Gemming: I mean, I think we've got a great community. So I would encourage people involved in Web3 to talk to their friends, reach out, connect. I know, you know, BlockchainNZ is one industry group work through Callaghan.

I often find, or I connect clients with each other, or they already connected. Because New Zealand's so small, so, and often they leverage each other or they, they put their, you know, combine. I think, yeah, just talk to people, talk to people amongst this group. Reach out, ping the Callaghan team and they can maybe help us with, with connecting you to the right people.

There's a really nice group in New Zealand of people who are you know, conversant in this space that went down the rabbit hole. I've had over 10 years. Others have quickly, quickly got stuck in. Some people are, are in the legal space. You know, separate to the tax, but there is, there is crossover, there's lots of other broader regulations, so we can put people in touch.

I think, Kevin, your question before around the, where people might be worried or uncertain or, or an element of fear that's that point I made earlier. If there's uncertainty, well we can help you navigate it so that you can get on and, and build out what you need to. I think people shouldn't be afraid of asking these questions, it's just that there's no, no precedence or an absence of, of guidance, which it doesn't mean you can't work through it, it's just that it's new.

So it needs, you know, discussion, conversation, consultation, community. So yeah, I would just say don't bury your head in the sand. Reach out and see if you can connect to someone and if, and we're quite good. If we, if we're not the right people for you, we'll absolutely say and we'll point you to someone else within our group.

I find, I actually get people reaching out to me and asking, can we do some of the, the you know, more complex or uncertain pieces alongside their ordinary everyday accounting. So I, I deal with other advisors as, as well. So yeah, use us as, as part of your network if you're, if you're happy to have us as part of the community, we'd love to be involved.

Kevin Whitmore: Awesome. All right. Well, thank you very much. We'll wrap it up there. Appreciate all your time and yeah, look out for the next learning series event as we continue to stand these up. Thank you all and we'll speak to you soon.