You Are Now A Cryptocurrency Millionaire! What Are Your Tax Liabilities? An Irish Example
Cryptocurrencies are becoming an increasingly popular investment, and people are now building up digital assets that they didn’t have before. As part of a new series we will take a look at crypto generated wealth and what the potential tax implications are. In the first of the series we have a guest post by Barry Flanagan, Senior Tax Manager with Taxback.com, an Irish tax refund service.
Once treated with skepticism and apprehension, cryptocurrencies have now become a global phenomenon and are a popular investment for more and more people.
The three most popular cryptocurrencies right now are Bitcoin, Ripple and Ethereum and thousands of tech-savvy people are ready to invest their fiat currency and venture into the world of cyber currency.
Interestingly, Ireland actually has its own cyber currency, aptly named “Irishcoin’. It was originally conceived with the Irish tourism sector in mind. In Dublin, people can pay for a pint, a pizza, or a B&B with Irishcoin!
Popularity & Regulation
Cyptocurrencies are not regulated by the Central Bank and are not considered to be a legal tender throughout the Euro area, therefore only a small number of businesses accept cryptocurrency as a form of payment.
The lack of regulation in cryptocurrencies also makes them an extremely volatile investment. Yes, there is the potential to make a lot of money quickly, however, like a lot of investments, there is also the possibility that things could take a turn for the worst and your investment will be lost.
The cyrptocurrency market is going from strength to strength, so, if sometime in the future you become tempted into investing in them, there are some important things to note about taxation in the area.
Is tax due on my profits from my cryptocurrency investment?
Although you won’t find the Government or Revenue discussing cryptocurrency, that doesn’t mean that there is no tax obligation arising from your investment. There is nothing cryptic about your cryptocurrency tax obligations, in fact, quite the opposite is true.
The purpose of the Revenue’s self-assessed system is in the title. Revenue trusts taxpayers to evaluate their assets and finances correctly and pay the appropriate tax due.
Revenue looks at investments in cryptocurrency in the same manner as an investment in any other currency, stock, or share. If you are making a profit through the selling, gifting, or exchanging of your cryptocurrency, you need to declare it to Revenue for capital gains tax (CGT).
The first €1,270 of your cumulative annual gains (after deducting expenses and losses from other cryptocurrency investments – which will be explained below) are exempt from taxation. However, any further profit made will be taxed at 33% and you must file a tax return each year – it is unavoidable!
Even if you are certain that no tax will be due, you may still need to file a tax return (because of reliefs or losses).
How and when do I pay CGT?
The answer to this depends on whether you are a PAYE individual or self-employed.
If you are a PAYE individual then you will need to file a CG1 Return. If you’re self-employed you will choose the Form 11 option. If you make a disposal between 1 January and 30 November then you must pay CGT by 15 December of the same year. If you make a disposal between 1 – 31 December, you must pay CGT by 31 January of the following year.
How much detail about my investment will Revenue need?
A cryptocurrency investment portfolio can be complicated.
If you have traded Euro for Bitcoin, Bitcoin for Etherum, then Etherum for Euro, you can imagine how it can become confusing.
Revenue will require a lot of detail including descriptions of assets, sales proceeds and cost of acquisition, on your tax return. This is why it’s important to keep a detailed log of the relevant dates and values for each investment and any profits you make.
Every gain you make from a cryptocurrency disposal must be declared to Revenue – the more detail the better!
What happens if I make a loss?
There is always the risk that you will make a loss from your cryptocurrency investment. If this is the case, you will still need to file a tax return – a CGI 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 a loss, and in the same year, made a separate investment in Etherum which resulted in a gain, you can use your loss from the Bitcoin to offset the gain you made from Etherum.
Losses can also be used against capital gain made in later years.
Is there anything g I can deduct from my cryptocurrency tax bill?
There are a number of deductions that may be applied to a cryptocurrency CGT tax bill.
- The cost of purchasing the asset
- Costs such as fees paid to a solicitor or auctioneer when you acquired and disposed of the asset
- Mining (see below)
You can also adjust the purchase price ad enhancement expenditure for inflation.
Can I deduct cryptocurrency mining expenses?
Yes, one of the most common cryptocurrency expenses that can be deducted are costs that relate to mining.
Cryptocurrency mining 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. For example, if John were to purchase a bicycle from Mary using Bitcoin, a miner will verify this transaction to ensure that John’s Bitcoin is genuine.
To become a crytocurrency miner you don’t need a shovel or a spade. What you need is some specialized hardware and software. You’ll also need an encrypted online wallet. The cost of acquiring these can be expensed against your CGT liability.
I don’t intend to keep the profit from my investment. Do I still need to pay tax?
Yes, even if you intend to gift your investment to another person, you have to pay tax. To calculate your tax liability you should use the market value of the asset at the date the gift was given.
If you are using your investment to pay a debt, you will need to pay take on your investment before it is transferred to the creditor.
What is an unprompted qualifying disclosure and how do I make one?
If you have been investing in cryptocurrency for the last few years, but have yet to pay tax on your profits, it is advisable to contact Revenue by making an unprompted qualifying disclosure.
This is a disclosure 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 your investment with calculations of all tax underpaid together with interest arising (the current rate of statutory interest applied to Irish Judgment debts is 2%). The payment for any tax due should be included, although it may be possible to pay this in installments.
It is also likely that some penalties will 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 considering investing in cryptocurrency, keep in mind that 33% capital gains tax will be due on any profits over €1,270. Also remember that whether you make a profit or a loss, you will need to file a tax return each year.
Edited and prepared by Amy Murphy, Journalism student from DCU.