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How tax applies to Cryptocurrency

Tom Maguire discusses how tax applies to Cryptocurrency in his Business Post column

The UK tax authorities issued guidance in the past couple of weeks in relation to the taxability or not of “Cryptoassets”. The Irish Revenue issued similar guidance in and around this time last year. Given the UK’s clarifications, I thought it might be timely to have another look at our guidance.

Irish Revenue’s guidance looks to “cryptocurrencies” whereas the UK refers to “Cryptoassets” but nothing really turns on this distinction without a difference given the UK explain that Cryptoassets are also referred to as ‘tokens’ or ‘cryptocurrency’. It continues that they are cryptographically secured digital representations of value or contractual rights that can be transferred, stored or traded electronically, so it’s “all rock ‘n roll to me”.

The UK’s tax authorities do not consider the buying and selling of Cryptoassets to be the same as gambling which may not be taxable. It notes that the term ‘gambling’ is not defined in their tax code and explains that whether a transaction can be characterised as betting or gambling is a question of fact, or put another way, a “does it do what it says on the tin” analysis as opposed to a legal analysis is to apply. The guidance says that it will be down to the tax inspector to consider the particular facts of any transaction involving Cryptoassets and conclude whether that transaction had the character of betting or gambling but the UK authorities’ general view is in the negative. So effectively it’s over to the taxpayer to convince the authorities otherwise.

Early in the previous century the UK courts took the view that a bet is “merely an irrational agreement that one person should pay another person on the happening of some event”. Is betting against a white Christmas in the Arctic irrational? Anyway, the Irish Revenue’s guidance doesn’t look at the gambling point but merely says that for humans and companies that the “profits and losses … on cryptocurrency transactions must be reflected in their accounts and will be taxable on normal” income tax or corporation tax rules. So if a taxpayer is trading in such assets then income or corporation tax will apply.

Irish Revenue’s guidance deals with traders and non-traders and you’ve got to remember that it's not a slam dunk that a human or company will be regarded as trading. Sure in certain instances a trade is like the elephant in that you’ll know one when you see one. But sometimes it’s not that simple. A case came before the UK equivalent of our Tax Appeal Commission a few years ago (this century). It concerned a pharmacist (Akhtar Ali) who bought and sold shares over a period from a room above his shop. Akhtar Ali said he undertook this activity on a commercial basis and to make a profit and he employed locums at his pharmacy so as to free up time for his ‘day trading’ upstairs. Details are critical in determining whether someone is trading and in the end the court held he was trading in shares. The result was that he was chargeable to income tax and could use trading losses to reduce his income tax bill.

If a company is carrying on a trade then it’s generally chargeable to tax at 12.5%. There’s an immense amount of court decisions on what carrying on a trade means. Meeting that test is a high bar, as it was in Akhtar Ali’s case, and a company needs economic substance here to be trading and to be eligible for the 12.5% rate. Similar trading rules apply to humans notwithstanding they don’t benefit from the 12.5% rate.

Irish Revenue’s guidance explains that for businesses which accept payment for goods or services in cryptocurrencies there is no change to when income is recognised or how taxable profits are calculated. A law change would be otherwise needed and it would seem that’s not necessary given that hundreds of years of tax law and court decisions can deal with this new-fangled asset (crypto, or otherwise). The guidance explains that 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 if you’re not regarded as trading in Cryptoassets but you make an actual gain or loss when you dispose of some or all of your interest in those assets? Revenue’s guidance says that such a disposal would “normally” be dealt through the Capital Gains Tax (CGT) code. The guidance explains that such gains and losses incurred on cryptocurrencies are chargeable or allowable for CGT purposes. Any gain arising on the disposal of the Cryptoasset is taxable at a rate of 33%.

While I’m on that point, regular readers will know my view on the rate of Capital Gains Tax. I’ve written in these pages previously that in 2002 when the 40% CGT rate was halved the yield on CGT increased substantially with the result that it became clear that the rate of CGT hugely influenced its yield in a way which was completely different to other forms of tax. It wasn’t to be in the last Finance Bill but given where we are in the Jurassic economy then any increased yield for the Exchequer without increased financial pain on our population is something that should continue to be considered.

But back to Cryptoassets. Paying employees in Cryptocurrency isn’t left out of Irish Revenue’s guidance. It 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 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.

It may be the tax equivalent of plus ca change plus c’est la meme chose in terms of Cryptoassets given Revenue’s view in their guidance that our tax code can handle Cryptoasset transactions.
 

Please note this article first featured in the Business Post on 11 April 2021 and was re-published kindly with their permission on our website.

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