Which taxes apply?
All of the main tax heads potentially apply to tax individuals on the holding of crypto assets, these are:
- Income tax,
- Capital gains tax (“CGT”),
- Capital acquisitions tax (“CAT”) known as gift or inheritance tax,
- Stamp duty and
This article will focus on income tax and CGT being the taxes relevant to most individuals. The tax position for companies is different to that for individuals and companies are not examined here.
What is trading in crypto assets?
As with any activity, the question whether crypto asset activities carried on by an individual amount to a trade is dependent upon a number of factors and the individual’s circumstances. Whether an individual is engaged in a trade through the activity of buying and selling crypto assets is a question of fact.
A trade in crypto assets is similar in type to a trade in shares or other financial assets. The approach to be taken in determining whether a trade is being conducted or not is also similar, and guidance can be drawn from the existing case law on trading in shares etc. The following are some key points to examine:
- The experience of the person carrying on the activity, is the person qualified with a relevant financial qualification related to financial trading activities?
- Whether any steps were taken to notify Revenue of the commencement of a trade?
- The business plan or general trading strategy, how well developed and thought through is the trading process?
- The reason for commencing the activity, particularly if the person had little or no previous experience.
- The type of crypto assets bought and sold, for example coins, tokens or NFTs.
- How the activity was funded initially.
- How precisely the activity is carried out and whether this is done in a commercial way.
- If use is made of any ‘robot’ trading programs, what influence does the person have on how the program operates?
- Whether a strategy was put in place to limit losses such as ‘stop-loss’ or a hedging strategy in case the market moves adversely.
- Whether the person actually uses any specific acumen and experience in the transactions carried out.
- The number and frequency of transactions.
- What research does the person undertake prior to carrying out any transactions? Is a thorough examination of the crypto asset carried out? Has the individual access to appropriate research platforms?
- Are the crypto assets bought and sold within minutes, or retained for some months or even longer?
- The time devoted to the activity, does the individual have other time commitments impacting on their ability to devote time to dealing?
Broadly, if an individual is subject to income tax on their crypto profits (or losses) then CGT treatment would not apply to the gain or loss made on crypto asset disposals.
It is commonplace for crypto companies to pay their staff with tokens or another crypto asset such as Bitcoin. Any such payments are subject to tax under the PAYE system with the primary obligation on the employer to account for the tax. Any subsequent disposals by the employee of their crypto asset are likely to be subject to CGT on the uplift in value.
Crypto assets can be awarded to ‘miners’ for verification work on the blockchain digital ledger. Whether such activity amounts to a trade (with the crypto assets mined taken as trade receipts) depends on a range of factors such as:
- degree of activity
Determining whether crypto mining activities amount to a trade or not is a difficult task, for example mining Bitcoin to scale requires significant investment and organisation to be done profitably whereas mining other coins is often done on a smaller scale.
If the mining activity does not amount to a trade, the Euro value of any mining receipts awarded will be taxable as income (most likely as miscellaneous income). If the individual keeps the mined assets, they may have to pay CGT on a later disposal.
Capital gains tax (“CGT”)
The CGT position for crypto assets can be extremely complex and often uncertain. Broadly, any form of property is an asset for CGT purposes and crypto assets are within the CGT net. Buying and selling crypto assets is not likely to be regarded as gambling and is therefore taxable.
What is a disposal for CGT purposes?
A ‘disposal’ for CGT purposes is a broad concept and includes:
- selling crypto assets,
- exchanging crypto assets (for example, swapping Bitcoin for Ethereum),
- using crypto assets to pay for goods or services,
- gifting crypto assets to another person.
The above list is not an exhaustive list of when a disposal can occur for CGT purposes. There is generally no disposal if the individual retains beneficial ownership of the crypto asset, for example an individual moving crypto assets between their own wallets should not amount to a disposal.
The use of a crypto mixer or tumbler is less clear from a CGT perspective and Irish Revenue have no known position on it, the position of HMRC in the UK is that the use of a mixer or tumbler where the same crypto asset is put into the mixer as is received back out should not amount to a disposal (aside from the disposal that would arise on the mixer or tumbler commission).
Broadly, if crypto assets are gifted to another person (other than to a spouse or civil partner), the disponer is treated as having disposed of the crypto asset for its Euro value at the time of the gift.
Certain crypto assets evolve over time, an example being the Ethereum Beacon Chain, the likely merge of the Ethereum Mainnet with the Beacon Chain is unlikely to amount to a disposal for CGT purposes and the position may be similar for the evolution other crypto assets.
Not all exchange fees are deductible in computing CGT in relation to crypto assets. Broadly, exchange fees relating to acquiring or disposing of crypto assets should be deductible. Fees relating to exchanging crypto assets likely require an apportionment as an exchange involves a disposal and acquisition of an asset. Costs involved in depositing or withdrawing Euro from an exchange would not be deductible for CGT purposes as Euro currency is not a chargeable asset for CGT.
Costs of mining activities (for example, computer equipment or running costs) would not be an allowable cost for CGT purposes in respect of crypto assets.
If the mining activity amounted to a trade for tax purposes the crypto assets when mined will be taken into account as trading stock. If these mined crypto assets are appropriated from trading stock, the base cost of the asset will be the value used in the trading accounts and CGT deductibility should be available.
Calculating the capital gain
Broadly, crypto assets are treated similarly to shares for CGT purposes although there are some important differences which are beyond the scope of this article. The primary rule in respect of a disposal is the “First In First Out” rule (“FIFO”). Under FIFO a person holding a crypto asset of the same type which have been acquired at different dates will be deemed to have sold the crypto asset acquired at the earlier time first. The FIFO rule is disapplied, however, where crypto assets of the same type are bought and sold within a period of four weeks, the asset identification switches to “Last In First Out” (“LIFO”). There are also further rules around loss restriction, however, a full examination of the LIFO provisions and loss restriction provisions are beyond the scope of this article.
The CGT return for individuals requires reporting of a number of different items, mainly the assets acquired and disposed of in that calendar year together with any capital gain or loss arising.
Bill opened an account on Binance, he transferred €10,000 to his Binance account, he incurred a charge of €20 on that transaction. Bill acquired 1 unit of BNB for €100 and 3 ETH for €6,000, Bill incurred an exchange fee of €100 on the ETH acquisition. Later that same year, Bill exchanged 2 ETH for 8,000 USDT, the Binance exchange fee on this transaction was €200, Bill’s BNB had increased in value to €200 and he opted to discharge this Binance exchange fee in BNB. How is Bill’s CGT position calculated?
|Disposed of 2 ETH for 8,000 USDT
|7,040 (convert $ to € at FX rate at that time)
|Base cost of 2 ETH (incl exchange fee)
|Binance exchange fee for ETH disposal
|100 (50% allocated to USDT acquisition)
|Gain on ETH disposal
|Disposed of 1 BNB
|Base cost of 1 BNB
|Gain on BNB disposal
|Total capital gains
|Less annual exemption
|CGT @ 33%
For the purposes of reporting on his annual tax return, Bill has made 3 asset acquisitions (BNB, ETH and USDT) and he has made 2 disposals (BNB and ETH). The base cost of Bill’s USDT should include half of the Binance exchange fee (€100) for future disposals. The €20 bank cost on Bill’s initial money transfer to Binance is not a deductible cost for CGT purposes.
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