On 27th April 2022 Revenue updated its guidance material to provide clarity on the tax treatment of transactions involving crypto-assets. This latest publication also provides worked examples.
The terms “cryptocurrency” and “cryptocurrencies” are not defined.
The Irish Central Bank places cryptocurrencies, digital currencies, and virtual currencies into the same category of digital money. It is important to bear in mind, however, that although defined in this manner, these “currencies” are unregulated and decentralised which means that no central bank either guarantees them or controls their supply.
Throughout Revenue’s updated document the term “crypto-asset” is used, which includes cryptocurrencies, crypto-assets, virtual currencies, digital money or any variations of these terms. Revenue state that the information contained in their most updated guidance is for tax purposes only.
Under Section TCA97 Ch4 s71–5, an individual who is resident in Ireland but not Irish domiciled is liable to Irish income tax in full on his/her/their income arising in Ireland, and on “non-Irish income” only to the extent that it is remitted to Ireland.
This is known as the remittance basis of taxation.
It’s important to keep in mind that the remittance basis of taxation does not apply to income from an office or employment where that income relates to the performance of the duties of that office or employment which are carried out in Ireland.
Section 29 TCA 1997 is the charging section for Capital Gains Tax.
s29(2) TCA 1997 states that a person who is Irish resident or ordinarily resident and is Irish domiciled is chargeable to Irish CGT on gains on all disposals (on his/her/their worldwide assets) arising in the year of assessment regardless of whether the gains are remitted to Ireland or not.
s29(4) TCA 1997 states that an individual who is Irish resident, or ordinarily resident, but not Irish domiciled is chargeable on gains arising on disposals of Irish assets in the year of assessment as well as on remittances to Ireland in the year of assessment in respect of gains on the disposals of foreign assets. In other words, an Irish resident/ordinarily resident but non domiciled individual is liable to Irish CGT on remittances in respect of gains arising on the disposal of assets situated outside the state.
From professional experience, the location of the crypto asset is often difficult to prove.
According to Revenue’s most recent publication:
“… where a crypto-asset exists ‘on the cloud’, it will not actually be situated anywhere and therefore, cannot be
viewed as ‘situated outside the State’.”
If the crypto-asset isn’t located anywhere and isn’t, therefore, considered to be a “disposal of an asset outside the state” then the remittance basis of taxation does not apply and the gain arising will be liable to Irish Capital Gains Tax based on the residency rules of the individual.
As you can see, it is very much the responsibility of the taxpayer to be able to prove the location where the gain arose on the disposal of the crypto-assets.
Revenue have outlined their record keeping provisions in relation to all taxes as follows: https://www.revenue.ie/en/starting-a-business/starting-a-business/keeping-records.aspx
In situations where the records are stored in a wallet or vault on any device including a personal computer, mobile phone, tablet or similar device, please be aware that these records must be made available to Revenue, if requested.
As with all taxes, full and complete records must be retained for six years in accordance with legislation. It is important to keep in mind that these provisions apply to all taxpayers, including PAYE only taxpayers.
For further information, please follow the link: https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-02/02-01-03.pdf
HMRC issued it’s updated Digital Service Tax guidance material today in which it confirmed that cryptocurrencies are unlikely to meet the definition of financial instruments, commodities or foreign exchange and will therefore, not be exempt from the Digital Services Tax. For further information, please click: https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto48000
This means that exchanges dealing in crypto assets will be subject to the 2% digital services tax on their revenue.
HMRC has confirmed that it will issue ‘nudge letters’ to known UK resident crypto-asset investors who it believes may have underpaid tax on their cryptocurrency transactions.
Therefore, if you have used, bought or sold crypto-assets between 6th April 2020 and 5th April 2021, you should check whether or not you have a reporting obligation to HMRC.
Although the letters are not being sent out to non-UK domiciled individuals, this does not mean that HMRC’s view on the situs tests for crypto-assets has changed. For further information on the location of crypto assets please click: https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto22600
Cryptocurrencies are also known as virtual currencies and include the following:
Ireland has its own cryptocurrency called “Irishcoin”.
In Revenue’s most recent guidance material outlining how cryptocurrencies transactions should be treated for Irish tax purposes, they formed the view that no special tax rules are required. For further information please click the link: https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-02/02-01-03.pdf
One of the common questions arising is whether the profits or losses arising from cryptocurrency transactions are liable to Income Tax/Corporation Tax or if instead, they are subject to Capital Gains Tax.
In other words, it is important to keep in mind that there are different tax treatments for those trading in cryptocurrency and those investing in it.
If the cryptocurrency transactions are deemed to a trading activity then the profits are subject to Income Tax/Corporation Tax. Capital Gains Tax, however, applies to gains arising from the disposal of cryptocurrency which is held as an investment.
Trading activity or investment?
This answer is determined by reference to what are known as the “Badges of Trade” as well as to related case law.
The ‘Badges of Trade’ are a set of indicators to decide if an activity is a trading or an investment activity and include the following:
It is not essential that all the above “badges” be present for a trade to exist. When you examine all the badges present in the context of the activity carried out then it’s possible to ascertain if you are carrying out a trade in cryptocurrencies or investing in them.
Another way to look at this is to consider whether you are a passive or an active investor.
If you make a one-off purchase of a few coins that you retain in the hope the value increases then it would be fair to say you are a passive investor and any gain arising in the case of an individual, would be liable to Capital Gains Tax at 33% after offsetting any prior year and current year capital losses less the individual’s personal CGT exemption of €1,270.
If, however, there are multiple transactions taking place on a frequent basis, with a high level of organisation and a commercial motive (i.e. the aim of buying and selling the coins is to create/optimise profit) then it would be reasonable to consider yourself an active trader and any profits arising would be liable to Income Tax / Corporation Tax. For example, profits derived from crypto mining activities carried on by an individual or a company, would be treated as trading profits and liable to Income Tax/Corporation Tax.
It is essential, therefore, that this should be correctly established by each taxpayer, given their own specific set of circumstances, from the very beginning, to avoid any costly errors further down the line.
As with all tax issues, it is vital to establish the residence and domicile of the investor. Depending on the location of the cryptocurrency exchange, gains arising for non-resident individuals may be outside the scope of Irish tax. Individuals who are Irish resident but non domiciled may be able to available of the remittance basis of tax.
What about VAT?
The Revenue Commissioners consider cryptocurrencies to be ‘negotiable instruments’ and therefore exempt from VAT. This treatment applies to companies and individuals buying and selling cryptocurrencies. Mining activities are also considered to be outside the scope of Irish VAT.
Financial services consisting of the exchange of cryptocurrencies for traditional currency are exempt from VAT where the company performing the exchange acts as the principal.
Value Added Tax, however, is due from suppliers of goods or services sold in exchange for cryptocurrencies. The taxable amount for VAT purposes should be calculated in Euro at the time of the supply.
What about Payroll Taxes?
Where an employee’s wages and salaries are paid in a cryptocurrency, the value of these emoluments for the purposes of calculating payroll liabilities is the Euro amount attaching to that cryptocurrency at the time those payments are made to the employee.
The amounts contained in returns made to Revenue must be shown in Euro.
Finally, as crypto currencies are traded on a number of exchanges, a reasonable effort should always be made to use an appropriate valuation for the transaction in question.