Understanding 2025 Provisional Tax

Provisional tax is a method of paying income tax in instalments throughout the year, rather than in a lump sum at the end of the year. This system is designed to help taxpayers manage their cash flow and avoid a large tax bill at the end of the year. However, it can be difficult for cryptocurrency investors to manage due to the large fluctuations and volatility of cryptocurrency prices and market conditions compared to an ordinary commercial business, which may have more predictable revenue.

Who is required to pay provisional tax?

In New Zealand, a person is required to pay provisional tax if their residual income tax (RIT) for the prior year is more than $5,000. The RIT is essentially the taxpayer’s income tax liability minus any tax credits, excluding provisional tax paid. Provisional tax is typically paid in three instalments. For example, for a standard 31 March balance date, the instalments are due on 28 August, 15 January, and 7 May.

The amount of provisional tax is calculated using one of three methods: the standard method, the estimation method, or the ratio method. Most of our clients use the deaful standard method. The standard method involves paying 105% of the previous year’s RIT, while the estimation method allows taxpayers to estimate their RIT for the current year.

Cryptocurrency Taxpayer Scenarios

1. Losses for the Year: If a cryptocurrency trader incurs losses for the year, they may not have to pay provisional tax if their RIT is $5,000 or less. Losses can be carried forward to offset future taxable income, potentially reducing future tax liabilities. This can provide relief and improve cash flow for the taxpayer.

2. Less Profit than Last Year: If the taxpayer’s profit is less than the previous year, they can use the estimation method to calculate their provisional tax. This method allows them to estimate a lower RIT, which can reduce the amount of provisional tax payable. However, they must ensure their estimate is fair and reasonable to avoid penalties and interest.

3. Same Profit as Last Year: If the taxpayer’s profit remains the same as the previous year, they can use the standard method to calculate their provisional tax. This involves paying 105% of the previous year’s RIT. This method is straightforward and avoids the risk of underestimating tax liability.

4. More Profit than Last Year with RIT Above $60,000: If the taxpayer’s profit increases and their RIT exceeds $60,000, they will be subject to use-of-money interest (UOMI) if they do not pay the correct amount of provisional tax on time. UOMI is charged on any underpaid tax from the date of the final instalment. To avoid interest, the taxpayer should consider making voluntary payments on 7 May 2025.

Recommendations for Our Clients

To avoid unexpected tax bills or surprises, it is crucial for clients to calculate their profit now and develop a tax strategy.

Unfortunately, there is no Xero for cryptocurrency clients; we don’t have visibility of how your profit is tracked during the year without doing the profit calculations. Market value can sometimes be used as a proxy. However, only realised gains and losses are taxable, which will affect this.

Knowing when tax is due and how much to pay will help them be prepared. Clients should also consider whether borrowing money from a bank to buy cryptocurrency is a wise decision, as not paying taxes on time is akin to borrowing money to cover tax liabilities. By planning ahead, clients can manage their cash flow effectively and avoid unnecessary financial stress.