All around the world many people are building up digital assets that they didn’t have before. In the first of an ongoing series we will look at crypto generated wealth and the potential tax implications of it. We start with a guest post by Barry Flanagan Senior Tax Manager with Taxback.com an Irish tax refund service.
Cracking the code of Irish cryptocurrency tax: all the cyber currency tax questions you were afraid to ask …
Once mysterious and treated with scepticism, cryptocurrencies are now becoming increasingly mainstream and a popular investment option for more and more Irish people.
Bitcoin and Ethereum are two of the most popular cyber currency options and thousands of technologically-savvy individuals are lining up to invest their hard earned cash.
Believe it or not, Ireland has its own cyber currency – “Irishcoin” – a cryptocurrency designed predominantly with the Irish tourism sector in mind. People in Dublin can actually pay for a pint, pizza and a room in a B&B with cryptocurrency!
Popularity & Regulation
It’s true that only a tiny number of businesses accept cryptocurrency – largely due to the fact they are not regulated by the Central Bank and are not considered to be legal tender in the Euro area.
The lack of regulation also means that cryptocurrencies are extremely volatile in nature. Investors can make a lot of money and fast! But there is also always the possibility that things can turn pear-shaped and your investment will be lost.
Cryptocurrencies are here to stay, so if, down the line, you find yourself investing in them, there are some important things you should know about your tax obligations.
1) Is tax due on my cryptocurrency investment profit?
There’s nothing cryptic about your cryptocurrency tax obligations. While it is rare that you will find the Government or Revenue recognising or even discussing cryptocurrency, that doesn’t mean there is no tax obligation arising from your investment. In fact, quite the opposite is true.
The purpose of Revenue’s self-assessed system is to …. self-assess. Revenue trusts tax payers to correctly evaluate their finances and assets and to pay the appropriate tax due.
An investment in cryptocurrency is looked upon by Revenue in the same manner that an investment in any other currency, stock or share would be. If you are making a profit through the disposal (selling, gifting or exchanging your asset) of your cryptocurrency, you will need to declare it to Revenue for capital gains tax (CGT).
Fortunately, the first €1,270 of your cumulative annual gains (after deducting expenses and losses from other cryptocurrency investments – further details below) are exempt from tax. But, any profit that you make above this figure will be taxed at 33% and you will need to file a tax return each year. There is no way to avoid it!
You may still need to file a tax return even if you are certain no tax will be due (because of reliefs or losses).
2) How and when do I pay CGT?
This depends on whether you are a PAYE individual or self-employed.
PAYE individuals will need to file a CG1 Return. If you are self-employed, Form 11 will be the correct option to choose. If you make a disposal between 1 January and 30 November you must pay CGT by 15 December of the same year. And, if you make a disposal between 1 – 31 December, you will have to pay your CGT by 31 January of the following year.
3) How much detail about my investment will Revenue need?
Many cryptocurrency investment portfolios can be complicated.
If you have traded Euro for Bitcoin, Bitcoin for Ethereum, Ethereum for Irishcoin, and Irishcoin for Euro – it is easy to see how things can quickly become confusing.
When it comes to tax return time, Revenue will require a lot of detail including description of asset, sales proceeds and cost of acquisition. This is why it is important to keep a detailed log of the relevant dates and values for each investment and disposal that you make. The more detail you can keep, the better.
Every single gain you make from a cryptocurrency disposal must be declared to Revenue.
4) What happens if I make a loss?
Due to their extremely volatile nature, making a loss from your cryptocurrency investment is also a possibility. Even if your investment results in a loss, you will still need to file a tax return – a CG1 form if you are a PAYE employee and a Form 11 if you are self-employed.
If you have made an investment in Bitcoin which resulted in losses, and a separate investment in the same year in Ethereum which earned you a profit, you can use the loss from the Bitcoin investment to offset the capital gain you made through Ethereum. You can also use losses against a capital gain made in later years.
5) Is there anything I can deduct from my cryptocurrency tax bill?
There are a number of deductions which may be applied to any cryptocurrency CGT tax bill.
- the cost of purchasing the asset
- costs (for example, fees paid by you to a solicitor or auctioneer) when you acquired and disposed of the asset
- Mining (more details below)
You can also adjust the purchase price and enhancement expenditure for inflation.
6) Can I deduct cryptocurrency mining expenses?
Yes. Perhaps one of the most common cryptocurrency expenses that can be deducted are costs relating to mining.
If you haven’t heard of cryptocurrency mining it may sound more complicated than it actually is. In short, rather than investing directly in Bitcoin, you can mine your own by verifying bitcoin transactions. So, for example, John buys a bicycle from Mary with bitcoin, in order to ensure that this bitcoin is genuine, miners verify the transaction. If you can be the miner to successfully verify the transaction you can earn yourself newly generated bitcoins.
To take part in mining you won’t need a shovel or spade. What you will need is some software and specialised hardware. You’ll also need an encrypted online wallet. The cost of acquiring these can be expensed against your CGT liability.
7) I don’t intend to keep the profit from my investment. Do I still need to pay tax?
Yes, you will need to pay tax, even if you intend to gift your investment to another person. To calculate your tax liability you should use the market value of the asset at the date the gift was given.
Also, if you want to use your investment to pay a debt, you will need to pay tax on your investment before it is transferred to the creditor.
8) What is an unprompted qualifying disclosure and how do I make one?
If you have been investing in cryptocurrency for a few years, but have yet to pay tax on your profits, it is advisable to contact Revenue right away by making an unprompted qualifying disclosure.
This is a disclosure that you enact before you are notified of an audit or contacted by Revenue regarding an inquiry or investigation.
When making a disclosure, you should include complete details of the investment with a full calculation of all tax underpaid together with interest arising (the current rate of statutory interest applied to all Irish Judgment debts is 2%). You should include the payment for any tax due, although it may be possible to pay this in installments.
It is also likely that some penalties will also be applied to any proposed settlement. In a case where a penalty arises the amount of the penalty is generally determined by Revenue.
The amount of the penalty will depend on whether:
- your disclosure was unprompted or prompted
- the additional tax due is above €6,000
- your error was careless or deliberate
- you cooperated fully during the process
If you are thinking about investing in cryptocurrency keep in mind that 33% capital gains tax will be due on any profit you make over €1,270. And, regardless of whether you make a profit or loss on your investment, you will need to file a tax return each year.