WELLINGTON - Thousands of young New Zealanders are receiving letters from Inland Revenue demanding tax on cryptocurrency gains that no longer exist.
The crypto community calls it phantom gains: tax owed on profits that existed briefly, on a screen, before the market took them back.
The capital no longer exists, but the tax obligation remains.
A New Zealand crypto trader who has held Bitcoin since 2017 was told he owes roughly $70,000 in tax on gains he no longer has.
Years of trading left him holding 0.2 BTC and no record of where the rest went.
"I feel scared and I have nowhere near the $70k that is probably due," he wrote in a thread in r/NZBitcoin that drew 63,000 views since posted last week.
"There's no way I withdrew or spent $180k on anything."
When he ran his trading history through tax software, it returned roughly $60,000 in taxable income a year, for several years running.
The figure did not match anything in his bank account.
One of many others had already been through it. He self-declared and paid $60,000 in tax plus $10,000 in interest and penalties, after moving funds in and out of Tether during sharp market dips in 2021.
"I genuinely didn't realise that was a taxable event," he wrote.
"It has absolutely broken me."
"I feel it should be taxed only as capital gains payable once gains are realised into fiat. I've paid a fortune in tax on an asset I haven't even realised."
These are not isolated cases.
They represent thousands of young New Zealanders now in debt to the state in their twenties, while already navigating a cost of living crisis and a housing market that has priced many of them out for years.
A five-figure tax debt at that age does not just cost money. It can rule out further study, delay a first home, or end the idea of starting a business, because every spare dollar is now spoken for before it is earned.
Inland Revenue has identified 355,000 unique crypto-asset users in New Zealand, who between them have made 57 million transactions worth $36 billion.
The first wave of letters went out in April.
Phantom gains are legal, and staying that way
The law behind this is section CB 4 of the Income Tax Act 2007.
Tax applies the moment you swap one crypto for another, not just when you cash out to dollars. Buying Bitcoin, then trading it for Ethereum, counts as selling the Bitcoin. The tax is based on what it was worth in New Zealand dollars at that exact moment, whether or not any real money ever changed hands.
Inland Revenue spokesperson Gay Cavill confirmed this directly to Cryptocurrency NZ.
"Disposal isn't just selling for cash - it also includes exchanging one cryptoasset for another because value is realised in that transaction," she said.
Asked whether the department recognised the phantom gains problem, Cavill did not dispute it. "Cryptoasset markets can be highly volatile, with values rising and falling quickly," she said.
"In some cases, customers may dispose of assets when values are high, only to subsequently see the value drop significantly. A customer may end up with a tax liability that is higher than the current value of the assets they have."
Asked whether the government was reviewing the tax treatment of crypto in light of that, her answer was unambiguous.
"IR is not actively reviewing the way in which crypto is taxed from a policy perspective, but we continue to provide guidance and tools to help customers understand their obligations and comply with the rules."
Asked specifically what options exist for a young investor who receives a letter for a sum they genuinely cannot pay, because the gains were never converted to dollars and the capital no longer exists, Cavill's answer was brief.
"The best thing anyone can do when they find themselves unable to pay a bill is to contact us so we can work something out," she said, pointing to Inland Revenue's standard guidance page on tax debt.
The answer described a process, not an outcome.
It did not address what happens to someone with no remaining assets to put toward an arrangement, no fallback, and a debt calculated against money that, in any meaningful sense, never reached their hands.
Cryptocurrency NZ asked Inland Revenue to clarify whether enforcement action could affect a taxpayer's business or other assets in that situation. The department did not directly answer the question.
Cryptocurrency NZ has made an Official Information Act request to Inland Revenue seeking data on how many letters have been sent, what proportion of the resulting debt is held by taxpayers under 30, and whether the department has formally assessed the scale of the phantom gains problem internally.
The human cost
"I feel scared," one trader wrote. "I feel totally fucked."
"It has absolutely broken me," said another, after a $70,000 bill he had not expected.
"Was gutted but wasn't much I could do," wrote a third, after near-daily trading that included losses to scam NFTs and so-called honeypot tokens left him paying close to $350,000 in combined tax and accountant fees, against gains that no longer existed in any usable form.
He was left with $150,000 from a position once worth considerably more.
What a bill like that actually means, week to week, is a payment plan running for years.
Josh Hawkey, director of crypto tax advisory firm TaxHawk, said taxpayers who cannot pay in full can enter an instalment arrangement with Inland Revenue, citing a $70,000 debt as a typical example of the kind of sum repaid over time.
If genuine hardship can be shown, financial relief may also be available, though only once a person's full financial position has been disclosed.
Based on Inland Revenue's standard repayment terms, a $70,000 debt spread over three years works out to roughly $450 a week before interest, which continues to accrue for as long as the balance remains unpaid.
For someone self-employed, that amount may need to be paid manually each week.
For someone on a salary, it comes directly off their take-home pay, every payday, for years, against a gain that stopped existing the moment the market turned.
For a generation of digital natives already locked out of the traditional paths to getting ahead, priced out of housing, sceptical of KiwiSaver, treating crypto as the one accessible way to build something for themselves, that repayment schedule does not function like a normal financial setback.
It replaces the thing they were trying to do.
Saving for a deposit, investing in further study, or putting money into a business idea all require the same thing a weekly payment to Inland Revenue consumes first.
The relationship is no longer one of a citizen building toward something. It is a citizen working to discharge a debt to the state, for money that existed for a matter of weeks on a screen years earlier.
For someone in their twenties, that asymmetry becomes the defining fact of their relationship with government, not a service they draw on, but a creditor they owe.
Hawkey said the timing of these letters often compounds with whatever else is already happening in someone's life.
One client was unravelling four years of unfiled tax issues at the same time his wife was recovering from a stroke that had left him solely responsible for the family's finances for the first time.
Another was managing the same process while dealing with his father's death.
"This is not the end of the world," Hawkey said he tells clients in moments like that.
"You are not going to jail. IRD is not going to knock your door down. But we do need to deal with it properly, and there is likely going to be some tax to pay."
Not how other assets work
New Zealand has no broad capital gains tax. But that protection is not shared equally.
A long-term NZX shareholder who holds for years and sells at a profit pays nothing on the gain. A property owner who holds beyond the 2-year bright-line period pays nothing either. A crypto investor who does exactly the same thing, buying, holding for years, then selling at a profit, is taxed on the full gain at their marginal rate.
The law applied to all three is technically the same, section CB 4, which taxes property sold with the intention of making a profit. What differs is the assumption Inland Revenue starts with. For shares and property, the default is that most people hold for the long term, so the gain goes untaxed.
For crypto, the default is the opposite: that everyone buying it intends to sell for a profit, which makes the gain taxable from day one.
Inland Revenue spokesperson Gay Cavill defended this as consistent. "Exchanging shares in one listed company for shares in another would also be treated as a disposal and acquisition," she said. "For crypto, the underlying tax consequences are the same."
That is true for people who actively trade shares. It is not true for the much larger group who simply buy and hold, the group crypto investors are usually compared to, and who pay no tax on their gains at all.
Hawkey said the gap comes down to age and precedent. "Crypto is still relatively new, and there is not the same body of case law," he said.
Whether that makes the current treatment unfair, or simply early, is a question nobody in government has yet tried to answer with real policy.
The case for reform
Hawkey does not think the underlying principle, taxing realised profit, is the problem.
His concern is what it costs to comply with it at crypto's scale.
"Someone might invest $1,000, make 10,000 transactions across 20 wallets and exchanges, and end up with only a couple of thousand dollars of tax to pay," he said.
"That can still take weeks of work to reconcile properly, and accountants cannot work for free. By contrast, someone might invest $10 million into Bitcoin and simply hold it. The tax work may be very simple because there is almost nothing to reconcile. That is where the system feels disproportionate."
One commenter in the Cryptocurrency NZ Facebook group described exactly that disproportion in practice. He said he had declared his crypto income correctly and in full, but reconciling his trading history manually, transaction by transaction, took him 135 hours.
There is also a way to owe nothing at all under the current rules: never sell, never swap, never spend. A holder who buys Bitcoin and leaves it alone indefinitely accumulates no taxable income, because no disposal ever occurs.
That structure rewards sitting still and quietly punishes anyone who tries to actually use crypto as money.
Bitcoin Policy New Zealand, a lobby group that launched in Wellington last November, has argued the current rules work against Bitcoin ever functioning as everyday currency.
The group's advocacy and its published policy work focus exclusively on Bitcoin, a narrower focus than the tax framework itself, which applies the same rules across all crypto-assets regardless of protocol.
Its first policy paper proposed a de minimis exemption for Bitcoin transactions under $1000, arguing the present settings "treat every spend as a taxable disposal and create tax and compliance hurdles that discourage merchant adoption."
Hawkey's own proposal goes further.
He suggests a threshold for casual investors: anyone holding under $50,000 in crypto at cost, making fewer than 100 trades, and using fewer than 5 wallets or exchanges, should not need to file at all until they actually withdraw value from the system.
"The lack of a tailored regime is part of the problem," he said.
"The same general rules are being applied to an asset class that can involve thousands of transactions, often by young people who did not understand the tax consequences at the time."
He was also critical of how some recent IRD correspondence has been worded.
Letters sent roughly six months ago carried the heading "declare your cryptoasset income now to avoid being audited," language he described as unnecessarily alarming.
"None of these were ever planning on going to audit, but the wording could have been a lot better," he said. "It added unnecessary stress to people potentially also dealing with a very stressful situation."
A political vacuum
No New Zealand political party currently holds a formal position on cryptocurrency or crypto taxation - or have accepted a crypto donation according to the Electoral Commission.
A review of Hansard records turned up eight mentions of Bitcoin in Parliament since 2014, the first a passing joke from then-Prime Minister Sir John Key about Green Party monetary policy.
This relative silence has created space for targeted advocacy.
Bitcoin Policy New Zealand, which formed in November 2025, hosted a launch event attended by Minister for Courts Nicole McKee, National MPs Joseph Mooney and Greg Fleming, and ACT list MP Cameron Luxton.
In June 2025, the group briefed more than 20 coalition MPs at Parliament.
Blockchain NZ has also pursued high-level engagement, including the launch of its cross-party Parliamentary Digital Assets Working Group (DAWG) in October 2025, which brought together 15 MPs (including two ministers), regulators such as the FMA, and industry leaders for education sessions and policy discussions at Parliament.
More recently, National MPs Joseph Mooney and Ryan Hamilton appeared on a regulation panel at NZ Crypto Con in June 2026, while TOP leader Qiulae Wong attended seeking feedback on potential crypto policy.
However, none of this engagement has so far translated into formal party policy changes to the crypto-to-crypto disposal rules driving the phantom gains issue.
The people carrying the cost are the same people any real policy would need to be built around. Many now facing five and six-figure tax bills are in their twenties and thirties, the group least able to absorb a debt that size while already squeezed by housing costs and a tightening cost of living, the same conditions that pushed them toward crypto in the first place during 2020 and 2021.
No major party has yet developed a position on what happens to them now.
Disclosure: CNZ administers the r/NZBitcoin subreddit and Cryptocurrency NZ Facebook group referenced in this story.