Cryptocurrency & Common Tax Issues by Robert Halley

Cryptocurrency & Common Tax Issues

by Robert Halley

The whirlwind growth in cryptocurrency assets in the past couple of years means that if you haven’t already had clients enquiring to you about associated tax issues, that day isn’t far off. Indeed, such is the simplified nature of trading and initial exponential growth that created a hype around these, it is likely that there will be many amateur investors out there who would not have traditionally been within the self-assessment system, and who may come to you now for advice as personal tax season approaches. The aim of this article is to tease out the variety of considerations across different tax heads, while bearing in mind this is a volatile and ever-changing market sector.

Since this is such a new type of asset and is neither regulated nor covered specifically within tax legislation, the updated Revenue guidance1 published in April 2022 has proved helpful in demystifying some of the issues. As a further reference point, HMRC have published very detailed material2 which can be useful in understanding some of the technical aspects involved in dealing in these assets.

The term cryptocurrency covers a wide variety of investments, such as Bitcoin, Digital Currencies and Tokens. While the types differ, in simple terms what we need to consider for tax purposes is that these are assets which can be bought and sold and to assess the tax impact of such transactions. Given that these types of assets can often be used to purchase goods or services, this raises an additional complication compared to share trading. In looking at whether a disposal has been made, we are not only considering straight sales of the asset for traditional currency, but also the exchange of the asset for a different asset type, and the exchange of the asset for goods or services received.

Direct Tax Issues – Income Tax, Corporation T and Capital Gains Tax

It is important to note that there is no hard and fast rule in assessing the treatment of the disposal for individuals and corporates, and each case will need to be determined based on its own facts. 

In their guidance, Revenue have clarified the key distinction to be made here is whether the individual or corporate is trading (in the normal vernacular as opposed to making trades) or whether they are investing.

In order to assess this, it is necessary to revert to first principles and consider the Badges of Trade in looking at any scenario. Key factors to consider would include the volume of transactions entered into, the length of ownership, the financial expertise of the person involved, their motive in entering into the transactions. 

Given the nature and complexity of the assets involved and considering the Badges of Trade, it is likely that the concept of trading will be a high watermark to reach in the vast majority of cases. As an example, an experienced financial trader who is working on a full time basis in buying and selling financial assets with a view to realisation of profit is probably going to be seen as falling within the trading category whereas an individual who has purchased the asset as an investment in the hope that this will appreciate in value and is not involved in making ongoing trades or a company with surplus cash which is likewise not devoting any personnel to engaging further in the market are more likely to be seen as investors and not trading.

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In assessing the direct tax implications these are clearly distinguished between both categories. 

For individuals where they are seen as trading then this will be reflected in their accounts and taxed under normal Income Tax principles. In the event that a loss arises then there may be a possibility to offset this against their other income for the year.

Alternatively, where the individual is not trading, then the transaction will fall under the CGT rules. 

It is important for practitioners to bear in mind the advanced in year payment dates for CGT as in many cases taxpayers are not aware of these, so it is something to highlight in the event that someone has made a gain in the current year. In the current market circumstances, there is a likelihood that many people could be sitting on uncrystallised losses, and where the assets are disposed of before year end, these can be offset against current year gains.

One aspect that is not fully fleshed out in Revenue’s guidance is the matter of allowable sale costs for CGT. The gain is simply referenced as sales proceeds less the costs of the asset. By contrast HMRC have gone into some level of detail in assessing which costs are and are not allowable. Many of these would follow a similar treatment to the Irish position. Although one item of interest is that the exchange transaction costs for swapping different assets are seen to be relating to both transactions and are attributed under UK rules. For Irish purposes since the matter of sales costs has not been covered, we would need to refer to s.552 TCA97 and the general rules on deductions for disposal costs. It is reasonable to suggest here that the incidental costs of making a disposal would include the exchange fees referable to that transaction, whereas general service costs of the operator that are not referable to the transaction would not be deductible.

One important residence matter to consider for individuals relates to the CGT remittance basis for non-domiciled persons. S.29 TCA97 provides that an individual who is resident or ordinarily resident but not domiciled in Ireland is not chargeable to CGT on a gain made on an asset that is situated outside the State. Revenue have stated that the onus is on the taxpayer to demonstrate the situs of the asset, and where they cannot demonstrate that this is outside the State, then CGT will still apply. They have further clarified that an asset located in the cloud, is not technically located anywhere, and so cannot be said to be located outside the State.

The tax position for companies follows a similar pattern. If this forms part of the trading activity of the company, then any profits or losses are reflected in their financial statements and subject to the normal rules. Where this is instead treated as an investment asset, then the chargeable gain is calculated with CT paid on that.

Another point of interest from a CT perspective is that since this is not a currency in the traditional sense, the accounts cannot be prepared in that currency, these must be laid out in Euro or another functional currency instead. Also since there are multiple exchanges in operation and not a single rate in operation, Revenue will be satisfied where a reasonable effort is made to assess an appropriate valuation. 

VAT Considerations

A detailed analysis of the VAT treatment of different asset types is possibly beyond the scope of this article but just to cover some of the headline issues.

The Court of Justice of the European Union in the Hedqvist case ruled that transactions in Bitcoin could be viewed as equivalent to traditional currencies. A transaction involving the exchange of Bitcoin or similar assets for traditional currency is exempt from VAT, where the person that makes the exchange does so as Principal (i.e. they buy and sell the asset in their own right as owner).

Where a person receives cryptocurrency in exchange for the supply of goods or services, that constitutes consideration in the same manner than as if they had received traditional currency. The taxable amount is the value of cryptocurrency exchanged at the time the supply is made.

PAYE Issues

Revenue have also provided clarity on a number of PAYE matters. Where an employee or director is provided with cryptocurrency in consideration for their work, that will be treated as salary as normal. In determining the amount to be declared on the payroll submissions on which taxes arise, this must be reflected in Euro and that is calculated based on the applicable rate at the time of payment.

Where an individual is provided with cryptocurrency for no cost or at undervalue, that is treated as a benefit in kind in the same manner as any other asset transfer. Lastly where the employee or director is granted an option to acquire the assets by their employer, Revenue will apply a similar treatment to the right to acquire share options.

In closing, late last year HMRC issued a series of ‘nudge’ letters to individuals and agents, based on information
shared by exchange operators.

This was an information campaign to make taxpayers aware of the tax treatment for various transactions, and there is every chance Revenue could follow suit with a similar campaign in future. This marks an opportune time to consider these issues in the context of your client base and address any matters to be resolved.

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Robert Halley

Robert works within the Corporate and International Tax team at Deloitte. He has extensive experience in advising domestic and international clients across all tax heads.