Insights

Irish Revenue gives guidance on how tax applies, or doesn’t, to Bitcoin

I was on holiday since my last column and got to see an episode of “the Big Bang theory” (with Italian subtitles!) entitled “the Bitcoin entanglement”. I’m late to the series! Sheldon and the guys acquired Bitcoin many years ago and realised its worth today. But enough spoilers because I got back to work to see that the Irish Revenue had issued a newsletter (e-brief) outlining their views on the Irish tax consequences of Bitcoin and cryptocurrency in general. Sheldon and his compatriot self-confessed nerds would have to get their own US tax advice!

The value of Bitcoin has fascinated people and as I write this it has a price of around €6,400 and will have moved by the time you read this! It came about in 2008 and by 2015 it was worth around €300. It was up at €14,000 last November. Hence Sheldon and co.’s interest in the present day. I’ll leave other debates to the economists because with me it’s “just the tax ma’am”; ok I know, but If Bruce Willis can misquote Agent Friday’s “Dragnet” line in Die Hard 2, so can I!

Bitcoin dates back to 2008 when someone named Satoshi Nakamoto (yet to be confirmed as an individual or a group) published a paper describing it as a peer-to-peer alternative to cash. You’d have to be pretty disappointed if you invented a shiny new currency form in 2008 only to find out that existing tax laws (some dating back centuries) could deal with taxing it! That’s the case according to Revenue; no new rules are necessary.

So good news first, VAT isn’t an issue. Revenue’s view is that Bitcoin and similar cryptocurrencies are regarded as ‘negotiable instruments’ for VAT purposes and exempt on that basis. Financial services consisting of the exchange of bitcoins for traditional currency are also exempt where the company performing the exchange buys and sells cryptocurrencies acting as owner of the virtual currency. However, VAT is due from suppliers of any goods or services sold in exchange for bitcoin or other cryptocurrencies with the VATable amount being the Euro value at the time of the supply.

The not so good news is that there’s no such exemption from the taxes on income and gains from cryptocurrency dealings. The semi-good news is that losses may reduce a tax bill once various Ts and Cs are met. The guidance deals with traders and non-traders and you’ve got to remember that it's not a slam dunk that a company will be regarded as trading and thereby chargeable to tax at 12.5%. There’s a vast amount of court decisions on what carrying on a trade means. Meeting that test is a high bar and a company needs economic substance here to be trading and hence eligible for the 12.5% rate. Similar trading rules apply to humans notwithstanding they don’t benefit from the 12.5% rate.

For example, a case came before the UK equivalent of our Appeal Commissioners a couple of years ago. It concerned a pharmacist (Ali) who bought and sold shares over a period from a room above his shop. Mr Ali said he undertook this activity on a commercial basis and to make a profit. Fair enough! When things got going, he employed locums at his pharmacy to free up time for his ‘day trading’ and he toiled away in the upstairs room. Details are critical in determining whether someone is trading in shares, or just generally, and I won’t go into them here as you could write a book on it (I did!) but in the end the court held he was trading in shares. The result being that he was chargeable to income tax and could use trading losses to reduce his income tax bill.

Revenue’s bitcoin guidance explains that for businesses (read traders, huge or small) which accept payment for goods or services in cryptocurrencies there is no change to when income is recognised or how taxable profits are calculated. Where there is an underlying tax event on a transaction involving the use of a cryptocurrency the tax law requires a record to be kept of it which will include any record in relation to the cryptocurrency. Therefore, income or corporation tax will apply to the resulting trading profits.

What about investments in cryptocurrency that aren’t trading in nature? The guidance says that such would “normally” be dealt through Capital Gains Tax (CGT). The guidance explains that such gains and losses incurred on cryptocurrencies are chargeable or allowable for CGT purposes. Imagine you bought Bitcoin at €14k; you would now be sitting on a paper (sorry digital!) loss of almost €8k. If you sold your investment you would make that loss real and it could be used to reduce such gains you may have made on other assets.

Some readers will question why pay CGT on gains arising from Bitcoin Currency? The Euro is a currency and we don’t pay CGT on that. The key here is that the Euro is the reference point for Irish tax purposes and it’s the currency of the State. Bitcoin is a currency without a bank’s or a country’s backing and so it’s an asset for CGT purposes. In effect, Bitcoin is a currency “foreign” to our law rather than a “foreign currency”.

Employees paid in Bitcoin aren’t left out. The Guidance says that where they are paid in a cryptocurrency, their payment value for the purposes of calculating payroll taxes is the Euro amount attaching to the cryptocurrency at the time the payment is made to the employee.

Overall, the Revenue guidance confirms that when it comes to Bitcoin it’s pretty much the same as any other foreign currency except many cryptocurrencies are traded on a number of exchanges and their value may vary between exchanges. The guidance recommends that a “reasonable effort” should be made to use an appropriate valuation for the transaction in question. So the guidance brings some certainty to Revenue’s tax treatment while simultaneously acknowledging the inherent uncertainties in cryptocurrency dealings. You can almost see Sheldon’s grimace!

Here’s the thing, Revenue guidance outlines its view on the law. Revenue is not the tax equivalent of Judge “I am the law” Dredd as only a court can be a final arbiter and the rule of law must out. Nevertheless, we now know how Revenue will view such transctions.

Tom Maguire is a tax partner with Deloitte and his fortnightly columns on tax matters appear in the Sunday Independent. The above article was first published on 3rd June 2018.

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