Made $1.1 million in crypto. Lost it all. Still owes $500k in tax. Right?
Note: I posted a shorter version of this post on LinkedIn, and it has over 60,000 views. Join the conversation on the original post here.
The IRD is currently ramping up enforcement and threatening audits for taxpayers who are non-compliant with crypto tax obligations.
But here’s the kicker: if a taxpayer makes a large profit in the 2023 year, then a loss in a subsequent year, they can be left owing a significant amount of tax, with nothing to show for it. Even worse, they may end up in a worse financial position than when they started, with negative equity and an unpaid tax bill.
From our conversations with prospective clients, this disconnect is one of the key drivers behind crypto tax non-compliance in New Zealand.
Example: The Taxpayer Who Made $1.1M and Lost It All
Jamie is a full-time crypto trader. He starts with $100,000 of cash in April 2022 and uses it to trade cryptocurrency. Over three tax years (YE 31 March 2023, 2024, and 2025), he never withdraws funds. It all stays within crypto.
He trades in his personal name and is taxed at the top marginal rate of 39 percent.
Year 1: YE 31 March 2023
Starting capital: $100,000
Jamie trades successfully, ending the year with a crypto portfolio worth $1.2 million
Realised profit: $1.1 million (based on growth from $100k to $1.2m through taxable disposals)
Tax payable: $1.1m × 39% = $429,000
Jamie does not pay the tax. He holds the crypto and believes the gains will continue.
Year 2: YE 31 March 2024
The market crashes. Jamie’s portfolio drops to $500,000
Realised loss: $700,000
He files his tax return and carries the loss forward
No tax payable for 2024
2023 tax of $429,000 remains unpaid, and IRD interest and penalties begin accruing
Year 3: YE 31 March 2025
Crypto drops again. His portfolio ends the year at $100,000
Realised loss: $400,000
No tax payable for 2025
The 2023 tax debt grows to approximately $500,000 (including interest and penalties)
Final Position – 3 Years Later
Item | Amount | |
|---|---|---|
Starting capital | $100,000 | |
Ending crypto balance | $100,000 | |
Total profit or loss over 3 years | $0 | |
Carried-forward losses | $1,100,000 | |
Tax payable (from 2023) | $500,000 (including penalties) | |
Net position | –$400,000 |
Yes, Jamie can carry forward his $1.1 million in losses, but he needs future income to use them. Based on a $120,000 salary, it could take him more than 9 years just to absorb the tax losses. Let alone repay the debt.
Summary
Jamie made $1.1 million on paper in Year 1. He did not cash out, did not pay the tax, and lost it all in the next two years. Now:
He is back where he started in crypto, with $100,000
He still owes $500,000 to IRD from Year 1
He has $1.1 million in tax losses with no income to use them
He is effectively $400,000 in negative equity
The Real-World Risk for Crypto Traders
Crypto can fall faster than IRD’s patience
You can owe tax on a profit you no longer have
Losses carried forward are no help if you have lost your capital
Profit does not equal cash. Tax is real. Plan accordingly.
What If There Were a Loss Carry-Back Mechanism?
Let’s replay Jamie’s situation, assuming New Zealand allowed losses to be carried back to a prior income year.
Year Ending 31 March 2023
Crypto portfolio: $1.2 million
Realised profit: $1.1 million
Tax payable: $429,000
Jamie does not pay this tax at the time. His crypto remains invested
Year Ending 31 March 2024
Portfolio drops to $500,000
Realised loss: $700,000
Jamie applies a loss carry-back to 2023
Revised 2023 income: $1.1 million minus $700,000 = $400,000
Revised tax: $400,000 × 39% = $156,000
Tax relief: $273,000
Year Ending 31 March 2025
Portfolio drops to $100,000
Realised loss: $400,000
Jamie applies a second carry-back to 2023
Revised 2023 income: $400,000 minus $400,000 = $0
Final 2023 tax: $0 × 39% = $0
Jamie completely eliminates his original $429,000 tax liability because his total profit over the three years is zero.
Final Position (as at 31 March 2025)
Item | Amount | |
|---|---|---|
Starting capital | $100,000 | |
Ending crypto balance | $100,000 | |
Total realised gain or loss | $0 | |
Final 2023 tax payable | $0 | |
Carried-forward losses | $0 (fully used) | |
Net position | $0 |
Why This Is Fairer
This approach is far more fair and equitable. Without a carry-back, Jamie ends up with a $500,000 tax bill and nothing to show for it, except paper losses that may never be used.
To be clear, tax should be paid on time, and there should be consequences such as interest and penalties when it is not. This is not about avoiding tax.
But because crypto is volatile, fast-moving, and attracts a new generation of investors, a loss carry-back mechanism would:
Improve compliance
Prevent tax bills on income that no longer exists
Better reflect economic reality
Key Takeaways
Without carry-back, Jamie pays tax on a profit that disappears
With carry-back, tax is only paid on net profit over time. In this case, zero profit means zero tax
Jamie’s effective tax burden aligns with his true financial result
The difference in outcome is $461,000
Bottom Line
Loss carry-back laws can mean the difference between bankruptcy and financial survival.
Without them, crypto traders risk:
Owing tax on income that has been lost
Being penalised for holding volatile assets
Carrying forward losses that may never be used
Loss carry-back helps align tax with actual financial outcomes, which is especially important in high-volatility environments like crypto.
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Contact Us
Contact Tim Doyle or Luca Lamplough 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.
