Cryptoassets & Income Tax – Inland Revenue’s Rulings
Recently, Inland Revenue reissued their 2019 and 2021 draft public rulings on the tax treatment of cryptoassets when they are paid as remuneration to employees. On 15 May 2023 Inland Revenue issued final versions of rulings. The have been rereleased in four parts covering the tax treatment of:
- Salary and wages paid in cryptoassets;
- Bonuses paid in cryptoassets;
- Employer issued cryptoassets provided to an employee; and
- How the employee share scheme rules apply when an employer issues cryptoassets to an employee.
Salary and Wages Paid in Cryptoassets
Inland Revenue’s ruling sets out that cryptoasset payments are classed as PAYE income payments and are subject to PAYE where there is a payment of remuneration to an employee in cryptoassets where the payments:
- are for services performed by the employee under an employment agreement;
- are for a fixed amount; and
- are part of the employee's remuneration package.
This classification only applies to salary and wage earners, not self-employed taxpayers, and will apply where the cryptoassets being paid:
- are not subject to a "lock-up" period;
- can be converted directly into a fiat currency (on an exchange); and either:
- a significant purpose of the cryptoasset is to function like a currency; or
- the value of the cryptoasset is pegged to one or more fiat currencies.
The classification will not apply where the cryptoasset provided is a share for income tax purposes and is received under an employee share scheme.
Bonuses Paid in Cryptoassets
The second ruling provides that where there has been payment of an incentive or bonus of an amount of cryptoassets to an employee in connection with their employment. In this circumstance, again the cryptoasset payments are PAYE income payments that are subject to the PAYE rules.
This classification only applies to salary and wage earners, not self-employed taxpayers, and where the cryptoassets being paid are an agreed deduction from a monetary amount. This does not apply where the cryptoasset provided is a share for income tax purposes that is received under an employee share scheme.
Employer Issued Cryptoassets Provided to an Employee
The third ruling sets out that fringe benefit tax laws will apply to an arrangement where there is an agreement to provide cryptoassets to an employee in connection with their employment in circumstances where:
- the employer is issuing cryptoassets (e.g. through an Initial Coin Offering, an Initial Exchange Offering, a Security Token Offering, or a Token Generating Event);
- the employee will receive the cryptoassets only if they are still employed by the employer at a specified future date (the condition); and
- the employee cannot sell or otherwise transfer the cryptoassets until the specified future date.
As above, this only applies to salary and wage earners, not to self-employed taxpayers. It will also not apply where:
- the cryptoasset provided is a share received under an employee share scheme; or
- the cryptoassets are not being provided as salary and wages paid in cryptoassets or as a bonus to the employee.
A fringe benefit will be provided when the condition is met, and the employee becomes entitled to the cryptoassets.
Where the employer is selling its cryptoassets to arm's length buyers at the time the cryptoassets are provided to the employee, the value of the fringe benefit is the "market value” meaning the lowest price at the time at which the goods were provided to the employee, for which identical goods were sold by the same person to an arm’s length buyer in a sale freely offered in the open market in New Zealand and made on ordinary trade terms.
Where the employer is not selling the cryptoassets at the time it is provided to the employee, the value of the fringe benefit is the "market value" at the time when the fringe benefit is received by the employee.
Where there is no "market value", the Commissioner will need to determine the value of the fringe benefit.
Application of the Employee Share Scheme Rules
Finally, Inland Revenue provides that the provision of cryptoassets by an employer (or another company in the same group) to an employee in connection with their employment in circumstances will fall under employee share schemes laws if:
- the employer (or other group company) is issuing the cryptoassets (e.g. through an Initial Coin Offering or a Token Generating Event);
- the cryptoasset is a share (i.e. it provides an interest in the capital of a company);
- the employee is not required to pay market value for the cryptoassets; and
- the cryptoassets are not provided under an exempt employee share scheme.
The ruling will only apply to employees and will not apply to providers of goods or services or self-employed taxpayers.
If it is an eligible arrangement, the following will apply:
- The provision of the cryptoassets by the employer (or other group company) to the employees is an employee share scheme.
- The value of the taxable benefit received by the employees will be calculated using the following formula: share value − consideration paid + consideration received − previous income.
- The amount of the taxable benefit will be the employees’ employment income.
The above is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax issues, please contact Julia Johnston or Josie Berliner at Saunders & Co