New Zealand tax authority approves crypto salaries

In August’s tax information bulletin, the country’s Inland Revenue Department laid out binding rules for the payment of wages in cryptocurrency. It allows Bitcoin, Ether, and other major cryptocurrencies to serve as a form of payment for New Zealand workers and be taxed accordingly.

The ruling is based on an interpretation of the Income Tax Act and states: "Originally, the concept of salary and wages would have been limited to payments in physical notes and coins. Later, payment may have been made by cheque. Now payment is likely to be made by direct credit to an employee’s bank account. As such, the concept of salary and wages has shifted over time with different payment methods."

This interpretation allows the tax authority to work around the inconvenient legal definition of cryptocurrency as property, rather than money in the traditional sense. Some cryptocurrencies share characteristics with cash, such as being "divisible, fungible, durable and hard to counterfeit", and can be classified as money to pay salaries — allowing the government to take a cut.

To be used in New Zealand’s Pay As You Earn (PAYE) tax system — in which employers deduct tax and other payments before wages are paid — the IRD says a cryptocurrency must "be sufficiently similar to existing notions of salary and wages."

This means the cryptocurrency must be either designed to "function like a currency" — like Bitcoin or Litecoin — or be pegged to one or more fiat currencies, like stablecoins Tether, TrueUSD, or perhaps, eventually, Facebook’s Libra.

Furthermore, the cryptocurrency must not be subject to a “lock-up” period, and must be able to be swapped into fiat currency either on a public exchange with KYC/AML provisions or using rates from a source approved by the Inland Revenue.

These requirements are aimed at preventing companies from paying employees using illiquid altcoins or utility tokens listed on obscure exchanges, making it difficult for employees to cash out.

Most of the large-cap coins meet these requirements, and can be used to pay employees as long as services "are performed under an employment contract, are for a fixed amount, and form a regular part of the employee’s remuneration." Self-employed taxpayers are not covered under the ruling.

Benefits of crypto wages

The new measures, which will be put into effect for three years from September 1st, are likely to encourage more businesses to offer part payment in cryptocurrency, and attract more tax revenue from companies that might already be doing so.

Demand from employees for cryptocurrency salaries is growing. Binance CEO Changpeng Zhao reportedly said last year that 90 percent of Binance employees have chosen to be paid in BNB. Other cryptocurrency companies, including British exchange CoinCorner and US exchange Kraken, have also claimed to pay employees in cryptocurrency when they request this.

Dave Hodgson, the director of NEM Ventures, and a New Zealand citizen, said the ruling is likely to make life easier for both employees and businesses.

"These kinds of assurances as businesses and employees are precisely what the industry has been asking of other jurisdictions for years now. My hope is that this ruling will prompt the remaining D9 to follow a similar approach," said Hodgson.

Stephen Macaskill, the CEO of Dasset, New Zealand’s leading digital asset exchange also sees the ruling as positive for New Zealand and the digital economy.

“This is a great example of how the New Zealand government is taking the initiative to create clarity and transparency within the digital currency space in New Zealand. By helping employees and employers understand the income tax treatment of digital currency, New Zealand businesses can comfortably pay their employees and participate in this new digital economy,” said Macaskill.