Out-Law / Your Daily Need-To-Know

Salary payments in cryptoassets raises tax issues

Out-Law News | 14 Aug 2019 | 4:06 pm | 2 min. read

It is open to employers in New Zealand to pay employees in cryptoassets, but there are tax and regulatory implications that may make that option unattractive for both businesses and their staff, an expert in payments has said.

Lauren McCarthy of Pinsent Masons, the law firm behind Out-Law, addressed the topic after New Zealand's Inland Revenue issued a ruling to confirm that regular, fixed salary payments paid in cryptoassets from 1 September 2019 will be subject to income tax. The ruling effectively legalises cryptoasset salary payments in the country.

"Ultimately, the issue turns on whether regular payments in cryptoassets come within the ordinary meaning of 'salary or wages' [under New Zealand's Income Tax Act 2007]," the NZ Inland Revenue said. "The answer to this is not certain. While a regular payment received in cryptoassets has many of the hallmarks of salary and wages, historically salary and wages have been payments in money."

"However, [section 6] of the Interpretation Act 1999 requires legislation to be interpreted as applying to modern circumstances," it said. "While not free from doubt, on balance, the commissioner’s view is that the concepts of 'salary' and 'wages' are wide enough to encompass some regular payments in cryptoassets. Consequently, these payments are 'salary or wages'… Therefore, they are 'PAYE income payments' … and the PAYE rules apply to them."

McCarthy said: "This is an interesting move from New Zealand’s Inland Revenue. It suggests either that there’s more of an interest for employees to be paid in cryptocurrencies, or it could just be that the tax authority is trying to achieve more certainty to increase its tax revenues."

McCarthy said that the UK tax authority HM Revenue & Customs (HMRC) has issued guidance on how payments to employees in cryptoassets will be taxed. However, employees should carefully consider the potential implications before receiving employment income in this form, she said.

"Agreeing with your employees to pay their wage in cryptocurrencies brings with it a host of regulatory and tax issues that firms and employees need to grapple with. It is also likely to cause flow-on effects, due to the volatile nature of the assets and the fact that other areas – such as credit checks and affordability tests – won’t have caught up yet," McCarthy said.

HMRC has issued guidance on when tax needs to be paid on receiving cryptoassets, and tax expert Catherine Robins of Pinsent Masons said that HMRC also appears to be giving increasing scrutiny to whether tax is in fact being paid when it should be.

"Press reports suggest that HMRC has been using its information powers to request information from cryptocurrency exchanges about the transaction history of their customers," Robins said. "This is likely to be with a view to taking action against those who have not declared income or gains for tax purposes."

"Traders in cryptocurrencies making large gains may be subject to capital gains tax or those trading very frequently may be subject to income tax if they are effectively carrying on a trade. Anyone who has not declared crypto gains needs to check their tax position – there is still time to file a return for the 2018-19 tax year," she said.