A Beginner's Guide To Cryptocurrency Investment In New Zealand

Cryptocurrencies are digital tokens that can be purchased through online exchanges or Initial Coin Offers (ICOs). They are not regulated in New Zealand and are high-risk, highly volatile investments. If you're thinking of investing in cryptocurrency in New Zealand, there are several exchanges to choose from, each with its own transaction fees, withdrawal limits, payment modes, and verification processes. This article will provide an introduction to investing in cryptocurrency in New Zealand, covering the basics of what you need to know and do to get started.

Understanding the risks of investing in cryptocurrency

There are several risks associated with investing in cryptocurrency that you should be aware of before making any decisions. Here are some key points to consider:

• Price volatility: Cryptocurrency prices can be extremely volatile, with sharp and sudden moves in price. This volatility is driven by market sentiment, speculation, and potential manipulation by crypto exchanges, media owners, and influential investors. It can be challenging for investors, especially retail investors, to build confidence and secure gains in such an unpredictable market.
• Unregulated market: Cryptocurrencies are currently unregulated by governments and central banks, creating a high degree of uncertainty. The lack of regulatory frameworks means there is a risk of future restrictions or even a ban on cryptocurrencies, which could significantly impact their value.
• Security risks: Cryptocurrency exchanges and digital wallets are frequent targets of hacking attempts and cyber-attacks. Investors need to be cautious as there is a risk of losing their digital assets due to theft or technical glitches, and it may be difficult to recover stolen funds.
• Limited market adoption: Cryptocurrencies have relatively low market adoption compared to traditional currencies. They are not widely accepted as a means of payment, which limits their practical value.
• Complex tax implications: The tax treatment of cryptocurrencies can be complex and vary across different jurisdictions. Investors need to carefully consider their tax obligations and keep appropriate records to ensure compliance.
• Risk of scams: The anonymous and unregulated nature of the cryptocurrency market makes it susceptible to scams and fraudulent activities. Investors should be cautious and carefully research any investment opportunities to avoid potential pitfalls.
• Contract risks: Investing in the futures market through contracts for differences (CFDs) carries additional risks. CFDs are complex instruments that can lead to rapid financial losses due to leverage. Investors need to understand the terms and potential risks associated with these financial products before engaging with them.
• Limited consumer rights: Cryptocurrencies do not have the same official safeguards or insurance as traditional investments through banks or brokerages. If issues arise, investors are dependent on the goodwill of the organisation they are dealing with to recover any losses.
• Network issues: Technical issues with the blockchain network, such as slow transaction processing or forks in the blockchain, can impact the value and accessibility of cryptocurrencies.
• Competition and dilution: The emergence of new cryptocurrencies and forks in the blockchain can lead to competition and dilution, affecting the value of existing cryptocurrencies.

How to buy Bitcoin in NZ

Bitcoin is a decentralised digital cryptocurrency based on blockchain technology. If you want to invest in Bitcoin, you'll need to consider how to buy and store it securely, as well as the tax implications.

How to buy Bitcoin in New Zealand

There are a few ways to buy Bitcoin in New Zealand:

• Bitcoin exchange: There are hundreds of Bitcoin exchanges, some based in Australia and the US. However, to avoid foreign exchange fees, it's best to use a Kiwi operator or big player that accepts NZ dollars.
• Goods and services: Any business or individual can accept Bitcoins as payment if they have a Bitcoin wallet.
• Mining: Mining Bitcoin involves using your computer to timestamp, process and validate transactions, for which you are rewarded with Bitcoins. However, this requires a huge investment in computer processing and electricity, so it's limited to big players.

Where to store your Bitcoin

As Bitcoin is not regulated, it's recommended to store it in a digital wallet, which can be downloaded as an app on your phone or computer. For added security, you can invest in a hardware wallet, a storage device that can be unplugged from the internet and kept in a safe place.

Online, there are plenty of retailers that accept Bitcoin, but there are fewer options in New Zealand. Bitcoin-friendly businesses can be found on Coinmap, which features an interactive world map.

Tax implications of buying Bitcoin in New Zealand

When buying and selling cryptocurrency, there are important tax implications to consider. The Inland Revenue Department (IRD) stipulates that everyone who buys and sells crypto in NZ has to pay tax on any profits made, regardless of whether they made a profit or loss. This includes people who:

• Bought crypto with the intention to sell it
• Bought crypto for a profit-making scheme

So, unless you're buying crypto to use as a currency to buy something, you must pay tax on any profits you make from selling crypto.

Where to store your Bitcoin

If you want to invest in Bitcoin, you need a secure way of storing your assets. As Bitcoin isn’t regulated, it’s not a good idea to store your Bitcoin at an exchange if you are heavily invested. There have been many recorded cases of people losing their money to cybercrime and hacking.

The Bitcoin organisation recommends storing your money in two separate wallets: a hot spending wallet and a cold savings wallet. The hot wallet should be stored on a mobile device and contain a small or medium amount of Bitcoin for everyday spending. The cold wallet should be stored completely offline, ideally in a fireproof safe, and contain the majority of your Bitcoin. It can be used occasionally to refill the hot wallet.

There are four different types of wallets: mobile, desktop, web, and hardware. Digital wallets are either hardware or web-based and can be used on a computer or phone. They are a good choice for walking-around money or travelling, but they are vulnerable to hacking. To find a digital wallet, you can research different companies for their security features, or use a tool on the Bitcoin organisation’s website. This will help you find a wallet based on your operating system, whether you want hardware, and other criteria such as control, validation, transparency, and privacy.

Offline wallets are safer than digital wallets as they are at less risk of being exposed online. However, if they are stored on a computer, they can still be susceptible to malware, so it’s best to use them with antivirus software. There are three types of offline wallets: hardware, paper, and coin.

Hardware wallets are stored on a piece of hardware like a USB stick. Transactions are completely anonymous, and the wallet is resilient to malware. If you lose the hardware wallet, you won’t be able to recover your Bitcoin, even with a seed phrase.

Paper wallets are a seed phrase written on a piece of paper. They are highly secure and allow for complete anonymity, but paper can be lost, damaged, or smudged, and ink can fade. If you are printing your paper wallet, you will need to consider any potential insecurities on your printer’s network.

Physical coins will have tamper-proof stickers that cover a certain amount of Bitcoin. They are highly secure and don’t require any internet usage, but they are expensive to purchase, and there is a risk of theft.

Tax implications of buying Bitcoin

In New Zealand, cryptoassets like Bitcoin are treated as a form of property for tax purposes. This means that profits from crypto investments are taxable at marginal Income Tax rates, which can be up to 39% depending on your total annual income. When you dispose of a crypto asset and make a profit, you will pay Income Tax on that profit. Disposing of crypto includes selling crypto for NZD or other fiat currencies, trading crypto for other cryptocurrencies, spending crypto on goods or services, and lending crypto.

It's important to note that buying crypto with fiat currency like NZD is tax-free. However, if you make a profit by selling or trading your Bitcoin, you will need to pay Income Tax at your marginal rate on that profit. Additionally, if you are mining or staking Bitcoin, you may be subject to Income Tax twice - when you receive it and when you dispose of it.

When calculating your crypto taxes, you will need to determine the value of your crypto income and profits or losses from disposing of crypto. To do this, you will need to identify the fair market value in NZD of any crypto income on the day you received it. For example, if you mine Bitcoin, you will need to calculate the fair market value in NZD of any Bitcoin mining rewards on the day you received them.

To calculate profits or losses from crypto, you will need to know your cost basis, which is how much your crypto cost you to acquire, plus any allowable fees. Once you know your cost basis, you can calculate your gain or loss by subtracting your cost basis from the sale price of your crypto. If you have a profit, you will pay Income Tax at your marginal rate on that profit. If you have a loss, you won't pay tax, but you can use this loss to reduce your taxable income.

It's important to keep good records of all your crypto transactions and ensure that you meet the deadlines for reporting your taxes. In New Zealand, the financial year runs from April 1 to March 31 the following year, and the deadline for reporting taxes is July 7. You can report your crypto income in your MyIR account on the IRD website or by filling out and posting an Individual Tax Return Form (IR3).

How to sell your Bitcoin

Selling Bitcoin (BTC) is a somewhat reversed process of buying it. Before you sell, you must have BTC on hand in your wallet. There are several ways to sell your Bitcoin, including online cryptocurrency exchange, direct peer-to-peer (P2P) transactions online or on-site, and through a Bitcoin ATM.

Online Cryptocurrency Exchange

To use a crypto exchange, you must set up an account with the platform of your choice. Many reputable exchanges require identity verification. Connecting a bank account is necessary for withdrawing cash. Be mindful of exchange restrictions based on your country, as some exchanges ban participation from certain regions.

Once you have an account on an exchange and have transferred your Bitcoin to that exchange, simply place a sell order, stating the type of currency you wish to trade, its amount, and your asking price per unit. The exchange will automatically complete the transaction once someone matches your offer.

After the funds are credited to your account, you will need to withdraw them to your connected bank account. This can sometimes take an excessive amount of time, especially if the exchange is experiencing issues with its banks or facing liquidity problems.

It is also important to be mindful of any withdrawal fees that may come into play on your platform of choice. In addition, exchanges may have a limit on the amount of money you’re allowed to withdraw within a certain period.

Direct Peer-to-Peer (P2P) Transactions

Another way of selling your Bitcoin is via a direct trade with another entity, either online or in person. There are several ways to achieve this, either by setting up a direct meeting to sell Bitcoin in person or by performing the transaction online through a specialised platform.

With online P2P Bitcoin sales, several specialised platforms exist to facilitate such transactions. In one way or another, these platforms essentially make it possible to trade Bitcoin for cash, or vice versa, with another party online.

In general, Bitcoin buyers post listings on these platforms, noting their desired price, their preferred payment option, etc. Interested parties then find listings they like and complete the sale by following the instructions provided by the platform.

These platforms typically involve escrow functions to provide a level of security for both parties and to help ensure asset transfer. Depending on the payment option, the seller of the Bitcoin may receive a transfer directly to their bank account or card, a wire transfer, or an agreement to receive funds to some of the popular traditional payments platforms.

Bitcoin ATM

Despite looking like traditional cash machines, Bitcoin ATMs are not ATMs in the traditional sense. Instead of connecting to the user’s bank account, they are connected to the internet to facilitate Bitcoin transactions.

Bitcoin ATMs are located all over the world, and their locations can be easily found online. However, they usually charge high transaction fees when compared with other methods. In addition, not every Bitcoin ATM offers both buy and sell functionality, which is important to keep in mind when looking for a Bitcoin ATM at which to sell BTC.

Sometimes, Bitcoin ATM providers require users to have an existing account to conduct selling operations, and the registration process often involves a lot of time and effort. For example, new users may need to provide a telephone number for activation and notifications, a government-issued ID, a palm scan, and a current photo taken by the ATM’s camera.

After your identity is verified, you are given a QR code with a wallet address to which you need to send your Bitcoin. Depending on the machine you’re using, you will either get cash out of the machine immediately or you will receive a redemption code and will need to wait for the transaction to be confirmed on the Bitcoin blockchain.

Frequently asked questions