The expression ‘crypto asset’ is often used as a blanket term for all digital assets – cryptocurrencies, tokens or virtual assets – designed to work as a peer-to-peer medium of exchange independent of any central bank.
Crypto assets, such as bitcoin, ethereum or cardano (to name but a few) are rapidly emerging into wider public ownership and usage, leaving tax authorities facing the challenge of how to treat and tax crypto asset transactions.
This article examines the current tax treatment of crypto assets in Ireland, taking into account Revenue’s guidance Taxation of cryptocurrency transactions, and the October 2020 OECD report, Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues.
If an individual or company is regularly buying and selling crypto assets, such transactions may constitute the activities of a trade
Income tax and corporation tax
The profits and losses arising to both unincorporated and incorporated businesses on crypto asset transactions are taxable under normal income tax and corporation tax rules. Broadly, if an individual or company is regularly buying and selling crypto assets, such transactions may constitute the activities of a trade (ie trading with a view to a profit).
Key factors in determining if buying and selling crypto assets may constitute a trade include:
- volume and frequency of activity
- level of organisation
- level of risk
Determining whether buying and selling crypto assets constitutes a trade or not is highly nuanced. Similar issues have previously been addressed in tax cases regarding conventional share trading.
In short, it has been found that even individuals trading in shares in an organised fashion with a high degree of volume and frequency are making investments rather than trading in shares, and it is thought that the same logic may apply to crypto assets. The position for companies is different, and it is possible that a company actively buying and selling crypto assets is carrying on a trading activity.
It is likely that profits derived from crypto mining activities, whether carried on by an individual or a company, would be regarded as trading profits subject to income tax/corporation tax rather than capital gains tax (CGT), although the matter is not beyond doubt.
The level of profit subject to tax would be determined using the financial accounts prepared in respect of the mining business. If the mining activity does not amount to a trade, the value of any crypto assets or fees received for successful mining, less allowable expenses, may be taxable as miscellaneous income.
It has become increasingly common for crypto assets to be used to generate additional income – for example, through DeFi staking – and any yields generated should be taxed as income rather than capital gains.
Capital gains tax
Revenue has clarified that, where a profit or loss on crypto assets is not within trading profits, it would normally be taxable as a chargeable gain or allowable loss for both individuals and companies.
Agents should be wary where one crypto asset is exchanged for another. It is our view that a gain or a loss arises when a crypto asset is disposed of, whether this be for regular currency or another crypto asset.
In certain circumstances, it may be possible to claim a loss where a crypto asset has become of negligible value. However, if an owner loses their private key and can no longer access the crypto asset, this likely does not mean it is valueless, and Revenue is unlikely to accept a claim for a tax loss in such circumstances.
Supplies of good/services
VAT arises in the normal way for suppliers of any goods or services sold in exchange for any crypto asset. The taxable amount for VAT purposes will be the euro value of the crypto asset at the time of the supply.
The Court of Justice of the European Union held that Bitcoin constitutes a currency for VAT purposes. Revenue considers cryptocurrencies as ‘negotiable instruments’ and exempt from VAT.
Exchange of cryptocurrencies for traditional currencies are exempt from VAT, where the company performing the exchange acts as the principal.
Income received from mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes.
Where an employee’s wages are paid in a crypto asset, the value of the wages for the purposes of calculating payroll liabilities is the euro amount attaching to that crypto asset at the time that those wages are paid to the employee.
An instrument transferring crypto assets from one person to another may be subject to Irish stamp duty but this is dependent on a number of factors.
Inheritance tax/gift tax
The receipt of an inheritance or gift of a crypto asset would be subject to capital acquisitions tax.
Deciding on the taxation of crypto assets can be a difficult task and an element of familiarity with crypto assets is certainly an advantage.
Aside from Revenue’s rudimentary guide on the taxation of crypto assets, there is little guidance in the public domain. There are a number of matters on which further Revenue guidance would be of use – for example, the taxation of initial coin offerings and the availability of the remittance basis of taxation on crypto assets for non-domiciled individuals.