• What are Virtual Asset Service Providers (VASPs) and why are they relevant for accountants?
• What are the main accounting challenges related to digital assets?
• What are the common questions and resources for accountants in the digital asset space?

• Exchange services between virtual assets and fiat currencies or between different types of virtual assets;
• Transfer services of virtual assets;
• Safekeeping or administration services of virtual assets or instruments enabling control over virtual assets;
• Participation in and provision of financial services related to an issuer’s offer or sale of a virtual asset.

VASPs are subject to various regulatory requirements in Ireland, as they fall under the scope of the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2021, which transposed the Fifth EU Money Laundering Directive (5MLD) into Irish law. VASPs are required to register with the Central Bank of Ireland and comply with anti-money laundering (AML) and Counter Financing of Terrorism (CFT) obligations, such as conducting customer due diligence, keeping records, reporting suspicious transactions, and implementing policies and procedures to prevent and detect money laundering and terrorist financing.

The regulatory space surrounding digital assets is evolving at pace. In mid-June 2024, we will see the first phase of the Markets in Crypto-Assets Regulation (MiCAR) become applicable. MiCAR introduces a new regulatory framework for European crypto-assets and aims to protect consumers and investors and mitigate risks to financial stability. While the Financial Action Task Force (FATF)defines service providers as VASPs, MiCAR will cover Asset-Referenced Tokens (ARTs), E-Money Tokens (EMTs) and utility tokens and will require Crypto-Asset Service Providers (CASPs) to achieve authorisation to operate within the EU.

Accountants may be providing professional services directly to VASPs. VASPs should also be considered as a good source of information when providing services to clients that invest or trade in digital assets. Accountants need to have an understanding of the services provided by VASPs and the financial and reporting information that they hold.

• Considering the tax implications of transactions involving virtual assets, such as how gains or losses from cryptocurrency transactions are treated for tax purposes and ensuring compliance with tax regulations;
• Tracking and reconciling financial transactions involving virtual assets and fiat currencies, to ensure accurate financial reporting for individuals or businesses engaged in cryptocurrency activities;
• Valuing virtual assets for financial reporting purposes, which can be complex due to factors like market volatility and liquidity. Accountants may need to stay updated on industry best practices for valuing cryptocurrencies and other virtual assets;
• Accounting for virtual assets as investments, which may require fair value measurement and impairment assessments. Some entities may hold virtual assets as investments, either for their own account or on behalf of their clients;
• Managing the risks associated with virtual assets, such as market risk, operational risk, and regulatory risk. Accountants may contribute to identifying, assessing, and mitigating these risks, using appropriate tools and frameworks.

1. Are gains from trading digital assets considered trading income or capital gains tax (CGT)?
2. How do I figure out where the client stands from a tax perspective?
3. Do I need an extensive knowledge of the crypto/digital asset space?

Trading Income or CGT?

According to the Office of the Revenue Commissioners, crypto assets are subject to income tax and CGT, depending on the type of transaction made. For example, if your clients trade crypto assets as part of their business, they will be subject to income tax at their marginal rate and may also have to pay social insurance contributions (PRSI) and universal social charge (USC). If your clients receive crypto assets as income, such as from mining, staking, airdrops, or rewards, they will also be subject to income tax.

If they sell or exchange crypto assets for a profit, they will be subject to CGT at a flat rate of 33%, after deducting any losses and the personal exemption amount of €1,270.

Some transactions are tax-free, such as buying crypto assets with EUR, holding them for long periods, or transferring them between your own wallets. However, you should keep records of all your crypto-asset transactions, as Revenue can track them and may require you to report them.

Determining Tax Positions

Determining the tax position and liabilities for your clients can be challenging, as they may have a considerable volume of trades across various crypto exchanges and wallets, and the value of the crypto assets may fluctuate significantly over time. Thankfully, there are service providers available that can help you with crypto-asset tracking and reporting, such as Koinly or CoinLedger. These services can trace and match every transaction on the blockchain and automatically calculate tax due, based on the Irish tax rules and rates. They can also generate tax reports and statements that you can use for filing and auditing purposes.

Crypto Wizard

You do not need to be an expert in the crypto/digital asset space, but you should have a basic understanding of the key concepts and principles, as well as the accounting and regulatory implications. You should also consult with your peers, mentors, or professional bodies for guidance and support.

• Buying crypto-assets with fiat currency, such as EUR, USD, or GBP, from a crypto exchange or a peer-to-peer platform;
• Selling crypto assets for fiat currency, either on a crypto exchange or directly to another person;
• Exchanging one type of crypto asset for another, such as swapping Bitcoin for Ethereum, or converting stablecoins to other cryptocurrencies;
• Receiving crypto assets as income, such as from mining, staking, airdrops, or rewards, or as payment for goods or services;
• Sending or receiving crypto assets as a gift, donation, or inheritance;
• Borrowing or lending crypto assets, such as using a crypto lending platform or a decentralised finance (DeFi) protocol;
• Investing in crypto assets, such as buying an NFT, a crypto fund, or a tokenised asset.

Crypto-asset transactions may not have a clear or consistent purpose or nature, as they may involve complex or innovative transactions, such as DeFi protocols, smart contracts, or tokenised assets, which may have different features, functions, and risks.

• The anonymity, pseudonymity, or lack of transparency of the transactions and parties involved, which may make it difficult to trace and verify the source and destination of the funds, the identity and location of the counterparties, and the purpose and nature of the transactions;
• The cross-border and decentralised nature of the crypto-asset ecosystem, which may expose your clients to different and inconsistent regulatory regimes and jurisdictions, and increase the complexity and uncertainty of the legal and compliance obligations;
• The technical complexity and innovation of the crypto-asset sector, may pose new challenges and threats to the security and integrity of the transactions and data and require constant adaptation and learning of the emerging trends and developments.

To manage the AML/CFT risks for your clients that deal in crypto-assets, you should apply a risk-based approach and take appropriate measures to mitigate the risks, such as:

• Conducting a thorough risk assessment of your clients and their crypto-asset activities, taking into account the type, value, frequency, and purpose of the transactions, the source and destination of the funds, the identity and location of the counterparties, and the level of compliance and oversight of the crypto-asset service providers involved;
• Verifying the identity and beneficial ownership of your clients and their counterparties, using reliable and independent sources of information, such as official documents, databases, or blockchain analysis tools;
• Monitoring and reviewing your clients’ crypto-asset transactions and activities on an ongoing basis, using appropriate tools and indicators to identify and flag any unusual or suspicious patterns or behaviours;
• Reporting any suspicious or unusual transactions or activities to the relevant authorities, such as the Financial Intelligence Unit (FIU) of Ireland, in accordance with the applicable laws and regulations;
• Keeping accurate and complete records of your clients’ crypto-asset transactions and activities, as well as the risk assessment and mitigation measures you have taken, for at least five years or longer if required by law or requested by the authorities;
• Educating yourself and your staff on the latest developments and trends in the crypto-asset sector, as well as the emerging risks and challenges, and updating your policies and procedures accordingly.

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