Revenue had issued guidance on the taxation of cryptocurrency transactions back in April 2020. This guidance has been further updated in the past couple of weeks. It points out that while cryptocurrencies are referred to as a currency by many, they are best referred to as assets. Therefore, the guidance uses the term “crypto-asset”, which includes cryptocurrencies, crypto-assets, virtual currencies, digital money or any variations of these terms.

Their guidance explains that there are no special tax rules for crypto-asset transactions. So from an individual’s perspective, the main taxes will be income tax and capital gains tax. It explains that the question of whether a trade of dealing in crypto-assets is taking place, or has taken place, depends on several factors and the individual circumstances. It’s often the case that individuals and companies entering into transactions relating to crypto-assets will describe the transaction as a ‘trade’ but the guidance rightly explains that the use of the word ‘trade’ in this context is not sufficient to be regarded as a financial trade for tax purposes. Same word, whole different meaning!

There’s a vast amount of court decisions on the meaning of carrying on a trade for tax purposes. Meeting that test is a high bar and a company needs economic substance here to be trading and hence be eligible for the 12.5% rate. Similar trading rules apply to humans notwithstanding they don’t benefit from the 12.5% rate. There are certain badges of trade which date back to the last century. They include such tests as frequency of transactions, what is being sold, how long did the person own the asset, was there a profit motive behind the sale and what circumstances gave rise to the sale. There are others and one must look at the whole picture to determine whether a trade exists for tax purposes notwithstanding the common use of that term in the commercial world. In short, a trade may not be a tax trade.

For example, a case came before the UK equivalent of our Tax Appeal Commission a number of years ago. It concerned a pharmacist (Ali) who bought and sold shares over a period from a room above his shop. Mr Ali said he undertook this activity on a commercial basis and to make a profit. When things got going, he employed locums at his pharmacy to free up time for his ‘day trading’ and he got busy in the upstairs room. Details are critical in determining whether someone is trading in shares, or just generally, but in the end the court held he was trading in shares. The result being that he was chargeable to income tax.

Revenue’s guidance explains that for businesses (read traders, big or small) which accept payment for goods or services in cryptocurrencies there is no change to when income is recognised or how taxable profits are calculated. Where there is an underlying tax event on a transaction involving the use of a cryptocurrency, the tax law requires a record to be kept of it which will include any record in relation to the cryptocurrency. Therefore, income or corporation tax will apply to the resulting trading profits.

What about investments in cryptocurrency that aren’t seen as being trading in nature? This is where Capital Gains Tax (CGT) applies. CGT is a tax on gains that arise on the disposal of assets such as land, buildings, shares etc. Crypto-assets would fall within the scope of an asset for CGT purposes. Some will question why pay CGT on gains arising from cryptocurrency? The Euro is a currency and we don’t pay CGT on that. The key here is that the Euro is the reference point for Irish tax purposes and it’s the currency of the State. Cryptocurrency is an asset for CGT purposes.

Irish resident individuals are generally subject to CGT on gains arising on the disposal of assets. In a nutshell, the gain subject to CGT is calculated as the sales proceeds less the costs of the asset. The resulting chargeable gain must be calculated for each disposal of each asset separately. Where an individual incurs a loss on an investment in an asset, that loss can generally be deducted from a chargeable gain in the same, or future, periods. If the loss is greater than the gain, the remaining loss can be carried forward to future periods for use against future chargeable gains. If the loss is less than the chargeable gain, or if there is no loss to be offset, the individual is entitled to claim an annual exemption amount of €1,270. The guidance points out that the annual personal exemption can only be used to reduce a chargeable gain and so cannot be used to create a loss i.e. if a chargeable gain is less than €1,270 the annual personal exemption is limited to the amount of the gain. Any remaining chargeable gain is taxed at the appropriate rate of CGT

Employees paid in crypto-assets aren’t left out. The Guidance says that where they are paid in a cryptocurrency, their payment value for the purposes of calculating payroll taxes is the Euro amount attaching to the cryptocurrency at the time the payment is made to the employee.

There are no specific rules in connection with crypto-assets and therefore any transactions in them need to be carefully analysed. From an individual’s perspective that could mean the difference between paying tax at potentially higher income tax rates or the lower CGT rate of 33% depending on your circumstances. The matter gets more complex where a taxpayer is subject to CGT on a remittance basis which applies to certain international events. Overall, this is a complex area both in understanding the tax effects, but also in understanding the underlying transaction in the first place.

This article was first published in the Business Post on the 16 May 2022 and was kindly republished on our website.