Who Owns Your Cryptocurrency? Tax Implications in New Zealand

In the evolving landscape of cryptocurrency investments, determining who legally owns digital assets and cryptocurrency and who bears the tax liability can be particularly complex. This question of ownership becomes especially important when joint finances intersect with individually held crypto accounts, creating potential confusion about tax obligations. Or an individual acting in their capacity on behalf of a company or Trust.

For example, John is a director of Crypto Investments Limited (CIL) and a Trustee of the Smith Family Trust (SFT). The company was incorporated solely to invest in cryptocurrency. Recently, the SFT sold a property for $1m. John wanted to use the funds to invest in cryptocurrency. So, he opened an account with Easy Crypto (in his personal name because they didn’t allow a Trust account) and purchased cryptocurrency with the $1m from the property sale. Who owns the cryptocurrency? John, the company, or the Trust?

The Easy Crypto account is in the name of John. The cash for the investment is from SFT, and John’s intention is for the CIL company to own the investment.

This situation isn’t limited only to cryptocurrency; however, with other investments, it can be easier to determine ownership. For example, property (real estate) in New Zealand has a title on each property, and the owner’s name is recorded on that title. A term deposit with a bank will have the account holder’s name and IRD number.

The Legal Owner vs. Financial Contributor

When cryptocurrency is purchased through an exchange account registered to one person, it is generally considered that the account holder is the legal owner of those digital assets and cryptocurrencies.

This remains true even when the funds used for purchase come from a joint bank account or represent shared household money, or the funds used were from a company or trust bank account.

There are other factors to consider

1. If the investment genuinely belongs to both spouses (where both contributed funds or the intention was joint ownership), you may split the income for tax purposes according to each person’s beneficial ownership share.

2. If you can demonstrate that both spouses have contributed to the investment or have a beneficial interest in it, the income should be split proportionally to your respective ownership interests.

3. Documentation of contributions from both parties is important to establish joint beneficial ownership.

This can be advantageous if one spouse is in a lower tax bracket, as attributing some investment income to them may reduce the overall tax burden.

While this may seem appropriate for couples, it is more difficult for companies and trusts without proper, formal documentation before the transaction occurs (see further below for more information).

Why Legal Ownership Matters

From a tax perspective, the registered account holder typically bears:

• Responsibility for declaring any taxable gains

• Liability for tax payments on profits

• Reporting obligations to the IRD

• Potential audit risks if compliance issues arise

Recommendations for Managing Cryptocurrency Investments

If you’re in a situation where one partner uses joint funds to purchase cryptocurrency in their name, or you are purchasing cryptocurrency on behalf of a company or Trust, you have several options to consider, each with different implications.

Please note that if you have already filed a tax return with IRD and are returning the cryptocurrency under one person’s name, any changes need careful consideration and are not recommended without individualised advice. You cannot pick and choose who owns cryptocurrency. It will generally be a matter of fact based on the evidence. If you wish to transfer it from, say, yourself to a company or Trust, this will result in a sale at market value (at the time of the same), and any gains will be taxable. Again, it is important that the sale is properly documented with appropriate legal agreements and payment.

• Maintain Status Quo: Individual Ownership

The benefits of this option are that it simplifies tax reporting (i.e., only one person is involved), and there is clear ownership. No additional documentation is required. However, the tax burden falls on one party, and it may create an imbalance in the financial relationship. Furthermore, it could become complicated during relationship property division.

• Formal Partnership Arrangement

Establishing a documented partnership specifically for cryptocurrency investments can create a legal framework for sharing both ownership and tax liability. We recommend that this is prepared before the investment commences and that joint ownership is clearly outlined. Joint ownership would allow for income splitting, which would utilise lower marginal tax rates.

There may be costs and time involved in preparing a written partnership agreement, along with both partner’s requirements to prepare and file tax returns.

• Family Trust or Company Ownership

A family trust or company may own cryptocurrency investments, potentially offering both tax advantages and clear governance around digital assets. This may have several benefits, including separation of legal and beneficial ownership, potential tax planning advantages, asset protection benefits, and clarity around succession planning.

There is an added complexity regarding legal documents for the set-up and ongoing compliance for these entities.

If an individual is purchasing or engaging in cryptocurrency transactions on behalf of a trust or company, it is critical that proper documentation is completed and the governing documents (trust deed or company constitution) allow for an investment in cryptocurrency and an individual to manage the investment.

Common documents required for trusts or companies are trustee resolutions, director minutes, shareholder resolutions, investment policy statements, bare trustee documents, etc. It’s crucial that these documents are prepared and signed before the investment is made.

Practical Recommendations

Based on common scenarios we see among New Zealand crypto investors, our recommended approaches include:

1. Document intentions upfront: Create a written agreement between parties outlining ownership intentions before making purchases.

2. Keep clear records: Maintain documentation showing the source of funds and any agreements about ownership.

3. Consult with professionals early: Seek advice from tax and legal professionals before establishing holdings.

4. Consider formal structures: Evaluate whether a partnership, Trust, or company structure is beneficial for your investment.

5. Implement relationship property agreements: Consider whether a contracting-out agreement under the Property (Relationships) Act would help clarify ownership.

6. Establish separate exchange accounts: Consider having each party maintain their own exchange accounts for their respective portions of each crypto investment (i.e., don’t mix personal and company/trust cryptocurrency together).

Case Study: The Smith Family

John and Sarah Smith use their joint savings to purchase $20,000 of Ethereum through an exchange account in John’s name. Three years later, they sold the Ethereum for $50,000, realising a $30,000 gain.

Scenario 1 – No Documentation: Without any formal agreement, John would likely be considered the legal owner and solely responsible for any tax on the $30,000 gain.

Scenario 2 – With Partnership Agreement: With a properly documented partnership arrangement created before the investment, John and Sarah might each be able to report $15,000 of the gain on their respective tax returns.

Scenario 3 – Company Ownership: If their company owned the Ethereum (with the exchange account in the company’s name or appropriate sufficient documentation to show that John was acting as an investment manager for the company, with appropriate director resolutions and shareholder resolutions), the company would pay the tax on the profit and then could pay a dividend to the shareholders or reinvest the profits back into the company.

It is not sufficient to have an intention for a company to purchase the cryptocurrency and then go ahead with the purchase in your personal name. An intention is not evidence of the company purchasing the cryptocurrency.

Proactive Planning is Key

The best approach is to address ownership and tax questions before making significant cryptocurrency investments:

1. Have the conversation: Discuss and agree on ownership intentions with your partner or with us as your accountant to ensure it is correct from the start.

2. Document your arrangement: Put agreements in writing with proper documentation.

3. Consider professional advice: For significant investments, seek legal and tax guidance.

4. Review periodically: As your crypto portfolio grows, revisit your ownership structure

Final Thoughts

While the registered account holder typically bears the tax liability for cryptocurrency transactions, parties can take proactive steps to create more equitable arrangements. The key is addressing these questions early, maintaining thorough documentation, and ensuring all parties understand the tax implications of their chosen approach.