New Zealand Plans to Drop 'Unfavorable' Sales Tax Treatment of Cryptocurrencies

New Zealand's tax authority is considering changes to its treatment of cryptocurrencies that would drop the current and controversial application of goods and services tax (GST).

The current regime sees bitcoin BTC$92,777.62 and other digital currencies as property, with normal rules applying. That means crypto is liable for 15 percent GST when changing hands within the country as part of a business's operations and potentially throws up a "double taxation" problem when income tax is later applied.

Calling the situation "unfavorable," the New Zealand Inland Revenue Department (IRD) has now suggested doing away with the GST liability for cryptocurrencies in many cases, but keeping the treatment for income tax.

In a policy issues paper made public on Monday, the IRD states:

"Because of their innovative nature, [cryptocurrencies] will often also have different features to ... other investment products. This means that some existing tax rules can be difficult to apply, involve very high compliance costs or may provide policy outcomes for some crypto-assets that lead to over-taxation compared to other alternative investment products."

The overall aim of any changes would be that cryptocurrencies should have a similar treatment to other investment products or asset classes that are "close substitutes" for the digital asset.

An issue being considered by the IRD is whether different types of tokens should have different tax treatments depending on how they are used. One way forward is that tokens used like currency or shares would likely not be liable to GST while other types might see the sales tax applied.

"An advantage of this approach is that it should provide a neutral tax treatment for those crypto-assets which are close substitutes for existing financial products such as currency or shares," the IRD says.

The tax department suggests it might still treat some tokens differently; for instance, if a token is considered to be a share "but if it does not provide an interest in a foreign company or partnership, it would still be taxed very differently to other foreign equity investments."

Yet, with thousands of tokens now available offering different use cases and features, the IRD says there may be "practical limitations" to their potential classification for tax purposes.

As such, a different approach being considered is to usher in more general changes to tax rules that are seen as throwing up "the most significant policy issues when applied to crypto-assets."

"There appears to be a case to exclude most types of crypto-asset from the GST and financial arrangement rules by developing a broad definition of crypto-assets for this purpose," says the IRD.

Whatever the solution, Inland Revenue recognizes change is needed. The department says, "The current GST rules provide an uncertain and variable GST treatment making, using or investing in crypto-assets less attractive than using money or investing in other financial assets."

Parties with an interest in the issue have until April 9 to offer their opinions on the best solution.

Australia, which had previously also imposed GST on some crypto transactions, ended the policy in October 2017. Singapore proposed the same policy change last summer.