The New Zealand Tax Podcast - Terry Baucher assesses where we are with the unfolding developments in taxing capital gains, with political, Inland Revenue, academic and crypto actions

(This transcript is collated from the podcast episodes released on 19th October and 3rd November)

An important case on the taxation of cryptoassets

According to Inland Revenue’s 2025 Annual Report at least 188,000 taxpayers own or have traded cryptoassets and have undertaken transactions worth a total value of $7.2 billion. The tax treatment of cryptoassets is something of a grey area. In the absence of a capital gains tax, it really falls to an almost all or nothing approach. If the crypto was acquired for the purpose of disposal or as part of a profit-making business, it's taxable. If it wasn't, then gains on disposal are arguably not taxable.

It's therefore very handy to see a Technical Decision Summary TDS 25/23 released by Inland Revenue on the taxation of the disposal of crypto assets. Technical Decision Summaries are prepared by Inland Revenue’s Tax Counsel Office and represent summaries of adjudication decisions made by the Tax Counsel Office on disputes between Inland Revenue and taxpayers. They are not binding per se, but they give you a good indication of how Inland Revenue might approach a particular issue. This decision from June this year will therefore be of great interest to many cryptoasset investors. The case is only eight pages in total and well worth a read.

TDS 25/23 – the facts

The taxpayers decided to invest in Crypto Y when it was still in the early stages of development. But the taxpayers were aware Crypto Y planned to offer staking rewards in the future. The taxpayers stated their dominant purpose in acquiring Crypto Y was as a long-term investment to obtain a regular investment return of about 5-10% in the form of Crypto Y staking rewards.

Shortly after investing in Crypto Y, the price increased significantly, so the taxpayers sold almost half their holding. They then reinvested about 30% of those sale proceeds into shares and bonds, and the balance back into Crypto Y. About nine months after their initial purchase, there was a major price drop, so the taxpayers used some of the cash they'd realised initially from the sale of Crypto Y to reinvest further into Crypto Y.

Two years after their initial purchase, Crypto Y started to earn staking rewards, and then subsequently, about 3 ½ years after their initial acquisition the taxpayers sold about 30% of their crypto in multiple transactions over an eight-month period, realising a “significant profit”. (It is a feature of TDS that details of the amounts involved are usually withheld as part of the anonymisation process).

An interesting turn of events

Now, this is where it gets interesting. The taxpayers initially completed their tax returns including as taxable amounts from the disposals of Crypto Y. They also returned amounts relating to the acquisition of staking rewards and claimed a deduction for crypto-related expenses.

The taxpayers then filed a Notice of Proposed Adjustment (NOPA), proposing to reverse the amounts previously returned as taxable. (By issuing a NOPA it appears the taxpayers decided to test their interpretation rather than possibly be challenged at a later date as part of an Inland Revenue review).

A NOPA triggers the formal disputes process so Inland Revenue’s Customer and Compliance Services (CCS) unit responded with a Notice of Response, rejecting the adjustments the taxpayers proposed, on the basis that it considered the initial tax returns as filed were correct. When the taxpayers and CCS were not able to reach agreement, the dispute was referred to the Tax Counsel Office adjudication unit as part of the standard dispute process.

Three key issues

The Tax Counsel Office identified three main issues:

1. Were the amounts derived from the disposal of Crypto Y (including the disposal of staking rewards) income under section CB 4 of the Income Tax Act 2007, (i.e. acquired with a purpose of disposal);
2. Alternatively, under section CB 3, did a profit-making undertaking or scheme exist;
3. And finally, was the acquisition of Crypto Y staking rewards income under section CA 1(2), (is income under ordinary concepts).

Inland Revenue 3, Taxpayers Nil

The Tax Counsel Office ruled against the taxpayers on all three grounds, determining Crypto Y had been acquired with a purpose of disposal, there was a profit-making undertaking or scheme, and it represented income under ordinary concepts.

Something which may not have helped the taxpayers is that they have quite a bit of experience in the sector. According to the TDS they had been involved in the crypto industry for several years and their statements and actions … "suggested they were looking for exponential growth in crypto assets rather than seeking a regular investment return in the form of staking rewards".

The view of the Tax Counsel Office was that the taxpayer has to prove that they did not have an intention to carry out a profit-making scheme or undertaking, or that the assets were required for the dominant purpose of disposal. In the view of the Tax Counsel Office, that was not demonstrated. In relation to the argument that the taxpayers were investors seeking returns from holding Crypto Y, the TDS notes:

The facts and circumstances showed that a regular return from holding Crypto Y (in the form of staking rewards) was unlikely to be the dominant purpose of acquiring Crypto Y. In particular, staking was not available at the time the Crypto Y was acquired, and the projected return from staking could have been achieved by investing in blue-chip dividend-paying shares without the risk involved with holding Crypto Y.

It is unsurprising that the returns from the sale of Crypto Y acquired through staking rewards was taxable. The key dispute here is over the gains realised from disposals of Crypto Y. But I think there's some obviously substantial sums involved here. So I would expect that the next stop would be the Taxation Review Authority and then perhaps we might have a High Court decision further down the path. Any such decisions will probably be a year or more away.

The present flaw in the tax system

But that will probably be a year or more away. Anyway, watch this space. Obviously, a lot of people will be looking at this. The decision will not be popular for those who realise substantial gains. But it's where we stand at the moment where the capital-revenue divide has an all or nothing effect in the absence of a comprehensive capital gains tax.

This all or nothing situation in relation to the taxation of crypto also applies for example, to property and other assets not within the brightline test or the general land taxing provisions. This all or nothing approach is a by-product of the absence of a capital gains tax. A capital gains tax would cover those scenarios where it's not income under ordinary concepts, such as the staking rewards. It would also bring us in line with many comparable countries.

So how does New Zealand compare?

A week after Inland Revenue published TDS 25/23 Tax Justice Aotearoa (TJA) released a short report (17 pages) looking at capital gains taxation in the Organisation for Economic Cooperation and Development, the OECD, and comparable nations. The report looks at all 38 countries that are in the OECD, including New Zealand, and how each country taxes capital gains. It also considers the position where there isn't a comprehensive capital gains tax.

According to this report, 31 of 38 OECD members, in other words over 80%, have explicit comprehensive capital gains tax regimes. Our traditional comparator countries, Australia, Canada, the United Kingdom and Ireland, all have capital gains tax regimes. What the TJA report also notes is such regimes typically include main residence exemptions, business asset relief provisions and loss offset rules, which means that capital losses can be offset against taxable gains.

Some jurisdictions give holding period discounts - a reduction in either the amount that's taxed or the rate that. For example, Australia and the United States, treat disposals of assets held for more than 12-months as a long-term gain and therefore 50% only of the gain is taxed.

There are six OECD countries (Switzerland, Luxembourg, South Korea, Belgium, Slovakia and New Zealand) without a comprehensive capital gains tax. But they have alternative mechanisms to tax capital gains, utilising various time-based asset-specific or notional return regimes.

Interestingly, Belgium and South Korea are slated to somewhat expand their taxation of capital gains in 2026. That doesn't mean that they have a comprehensive capital gains tax, but the scope of taxation has been broadened. This broadening of the base was a feature of tax reform in 2024 according to the OECD’s Tax Policy Reform 2025 report.

We have the most limited regime for taxing capital gains. We have the bright-line test, for residential property, but commercial property is not subject to the bright-line test and sales of farms are mostly exempt. International shares are subject to the foreign investment fund regime but gains from disposals of most Australian listed shares are only taxable if a taxpayer acquired them with a purpose or intent of disposal.

“Increasingly anomalous”

Tax Justice Aotearoa concludes “New Zealand's position is increasingly anomalous given international norms and the need to gather more revenue. This suggests comprehensive capital gains taxation systems are a viable tool to enhance fairness to diversify revenue sources and moderate property speculation, provided design and implementation address complexity and volatility concerns.”

It's probably no surprise that I think this is a fair comment in my view. It accurately reflects the present anomalous treatment of capital gains. The gains from the sale of a residential property sold within the bright-line test period will be taxed, but not those from a commercial property sold within the same timeframe will not. As TDS 25/23 notes the taxation of cryptoassets is something of an all or nothing situation. Long term, something more comprehensive for the fairness of the tax system is probably necessary.

We’ve discussed previously the International Monetary Fund’s view on the absence of a capital gains tax and its impact on productivity.

When you don't tax something, it is as distortionary as when you do tax something. And so that's a question I think we need to ask when considering New Zealand’s productivity and whether it has been affected by the fact that we have an enormous amount of money locked up in land rather than in businesses? We shall see. That debate will continue and next year it will be an election issue.

Labour unveils its capital gains tax policy

Speaking of next year’s Election, late in October the Labour Party announced, after a long internal debate, it is not going to introduce a wealth tax but will instead campaign next year on a narrow capital gains tax covering commercial and residential property (excluding the family home and farms). The revenue raised is designed to help fund three free doctor visits annually for everyone.

The basic principles are that it will be introduced with effect from 1st July 2027 on a “valuation day” basis. That is, the base cost for measuring capital gains will be the market value of the asset on 1st July 2027. Any gains realised subsequent to that date on the disposal of the asset will be taxed at a flat 28%. That rate is a little high by world standards, although I have to say the UK until quite recently did apply a 28% capital gains tax rate on disposal of property, so it's not extreme. In Australia, non-residents can have gains taxed at up to 45%. The rate is at the high end, but not in the extremely high end.

I spoke at length to Emile Donovan on RNZ nights about the topic. I said that Labour’s proposal is actually quite typical of how we've gone about taxing capital gains which is to add to the range of taxable assets incrementally.

“Everything is exempt, unless it’s taxable”

Our approach as Professor Mick Keen noted recently, is “everything is exempt unless it's taxed”, whereas most of the world says “everything is taxed unless it's exempted” which is probably conceptually easier to understand for most people. Notwithstanding that general approach, we have the overriding provision that if any asset is acquired with a purpose or intent of sale, the gains will be taxable.

One thing that that should also be kept in mind is Labour’s proposal basically builds on the last Tax Working Group's work. Remember that although three members dissented over the proposed comprehensive capital gains tax, all 11 members of the tax working group backed expanding the range of capital taxation to residential property.

It's not clear what the dissenters thought about taxing commercial property, but judging from comments made by Robin Oliver, one of the dissenters, on TVNZ he did not seem to be opposed to taxing gains from commercial property. If you accept the economic argument which has been advanced that a CGT is needed to help address over-investment in property, then the expansion to include commercial property seems appropriate.

But what about cryptoassets?

Although Labour's approach is understandable, as the Technical Decision Summary on cryptoassets discussed earlier highlights, the current incremental approach leaves gaps. Cryptoassets are now a large asset class that has emerged in the last 15 years or so, the treatment of which is open to interpretation. If you are trading in cryptoassets, as certainly some are, then it's pretty open and shut case that gains are taxable. On the other hand, the treatment is less clear where an investor argues cryptoassets are held for the long-term as part of a portfolio.

It would be interesting to get Labour's finance spokesperson, Barbara Edmonds’s take on whether Inland Revenue's current approach, looking at the interpretation and actual actions by taxpayers, is sufficient. Labour’s incremental approach reflects the politics of capital gains tax but as the treatment of cryptoassets illustrated by TDS 25/23 highlights the present approach lacks clarity.

And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.