The term “crypto-asset” is often used as a blanket term for all digital assets (cryptocurrencies, tokens etc). Cryptocurrencies, such as Bitcoin and Ethereum (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 trend is likely to continue into the future with the use of crypto-assets expanding likely leading to further Revenue engagement. Companies are also using issuing tokens (initial coin offerings) as a means of raising funding.
In May 2018 Revenue published guidance outlining how transactions involving crypto-assets should be treated for Irish tax purposes. In broad terms, Revenue have formed the view that no special tax rules are required for crypto-assets. Accordingly, the taxation of income or gains arising from crypto-assets will follow existing tax principles. While of some use, the Revenue guide is far from definitive and lacks in certain areas.
Income Tax / Corporation Tax
The profits and losses arising to individuals and companies on crypto-asset transactions are taxable under normal income tax and corporation tax rules.
One of the common questions arising is whether the profits or losses arising from crypto-asset transactions are subject to income tax/corporation tax or subject to capital gains tax (“CGT”). If the crypto asset transactions are regarded as being a trading activity the profits would be subject to income tax/corporation tax, CGT would apply to transactions in crypto-assets that are held as investments. This question is determined by reference to what are known as the “Badges of Trade” and also to related case law. Key factors to consider include, the:
- volume and frequency of activity,
- level of organisation,
- risk, and
The question of the taxation of profits or losses from crypto-asset transactions is nuanced. A similar question has been addressed in numerous tax cases in relation to 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 would apply to crypto-assets. The outcome of this is that gains or losses for individuals on crypto-asset transactions are likely to be subject to CGT (with some exceptions). The bar for a company to be regarded as trading rather than making investments is lower than that for an individual (the Badges of Trade must still be satisfied), Revenue accept that it is possible in certain cases for a company to be carrying on a trade of dealing in shares and the same analysis should apply to crypto-assets. The upshot of this is that these profits would be subject to tax at 12.5%.
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 CGT. The amount 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.
Passive income derived from the staking or lending of crypto-assets would be subject to income tax rather than CGT (similarly to interest income or dividend income from conventional investments).
Capital Gains Tax
Where a profit or loss on a crypto-asset transaction is not subject to income tax/corporation tax, it would normally be taxable as a chargeable gain or allowable loss for CGT purposes. Irish tax resident individuals and companies are liable to CGT (currently 33%) on any gains arising after offsetting current and prior year capital losses.
There is some confusion amongst many investors as to when a gain or loss is realised for CGT purposes. 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 other crypto-asset. For example, an exchange of Bitcoin for Ethereum would be a disposal of Bitcoin and an acquisition of Ethereum with the gain calculated by reference to the Euro equivalent values at the time of the exchange and at the time the Bitcoin was acquired. It is worth noting that a return to Revenue of all disposals and acquisitions of assets are required each year for Irish taxpayers.
Supplies of Good/Services
VAT arises in the normal way for suppliers of any goods or services sold in exchange for any cryptocurrency. The taxable amount for VAT purposes will be the Euro value of the cryptocurrency 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 at the principal.
Revenue advise that 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 cryptocurrency, the value of the wages for the purposes of calculating payroll liabilities is the Euro amount attaching to that cryptocurrency at the time those wages are paid to the employee.
The most commonly used crypto-asset exchanges are based outside of Ireland and thus transactions conducted on such exchanges are outside of the scope of Irish stamp duty. 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 (“CAT”). CAT applies at a rate of 33% to the value of the crypto-asset on the valuation date subject to reliefs applying.
Tax planning opportunities may be available for crypto-assets on a case by case basis. Opportunities exist in certain areas, for example:
- tax residence planning;
- domicile planning;
- loss crystallisation;
- initial coin offerings;
Please note that we can only advise clients of the firm, we do not respond to general queries made by non-clients. If you are interested in becoming a client of the firm please contact one of the below listed advisors.
This information does not constitute tax advice. Circulo do not accept any responsibility or liability for actions taken or not taken based on this information. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Any third party information contained herein is from sources believed to be reliable, but which we have not independently verified. This information does not constitute legal, tax, accounting, investment or other professional advice. Readers should consult their professional advisors prior to acting on the information set out.