We have received numerous new client enquiries who have been trading cryptocurrency for several years. These clients are accepting that they need to comply with tax regulations and properly disclose their cryptocurrency income to the IRD.
Income must be reported in the financial year it was earned. For clients who have cryptocurrency income in previous tax years, we assist them in preparing voluntary disclosures to the IRD to ensure compliance.
What is a voluntary disclosure?
A voluntary disclosure is when a taxpayer proactively informs the IRD of errors or omissions in their tax returns before the IRD identifies these issues independently. This may include unreported income or incorrectly claimed expenses. Any taxpayer can make a voluntary disclosure, which can apply to various tax types, including income tax, GST, and more, and can be submitted at any time.
There are significant benefits to voluntary disclosures. It can result in reduced penalties for the tax shortfall. If the disclosure is made before the taxpayer is notified of an audit (known as a pre-notification disclosure), the penalty reduction can be as high as 100% for certain shortfall types.
When the process is completed, clients are generally relieved and know they can sleep well at night, knowing their tax affairs are correct and up to date. It also helps to remove any uncertainty and the unknown of what a future tax bill may look like.
Inland Revenue requesting information
In cases where clients experience substantial losses in a specific financial year, the IRD may issue an information request to gather additional details. This is a routine procedure and far less severe than an audit. The IRD might request financial statements, profit and loss schedules, wallet addresses, and transaction records from cryptocurrency exchanges to verify how the losses occurred. This may include copies of bank statements showing original fiat deposits into cryptocurrency.
In most cases, we will have this information on your file and are able to provide it to IRD because we would have used it to prepare the financial statements.
We generally respond to these IRD requests on our client’s behalf. It can take IRD up to 10 weeks to process voluntary disclosures. It’s always best to get it the first time, but the second-best time is as soon as you know of a mistake or prior year’s omission.
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Contact Us
Contact Tim Doyle for a call or meeting to discuss any cryptocurrency tax or accounting questions. Our office is in Cambridge, Waikato, or we can arrange a video conference call.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
