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.