The Taxation of Income from Cryptocurrencies in Various Jurisdictions (Part 6): Ireland
By Joe McCall, Byrne & McCall
A cryptocurrency is a digital or virtual currency designed to work as a medium of exchange. The European Central Bank (ECB) defines a virtual currency as “a digital representation of value, not issued by a central bank, credit institution or e-money institution, which in some circumstances can be used as an alternative to money.”
Consistent with tax authorities’ recent push to catch up with innovations in the digital economy, the Irish Revenue Commissioners have issued guidance (Revenue eBrief No.88/18) on the tax treatment of cryptocurrencies. The purpose of the manual is to give guidance on the tax treatment of various transactions involving cryptocurrencies and to remove much of the uncertainty surrounding cryptocurrencies from a taxation perspective. It’s clear from the published Revenue guidance that cryptocurrencies require no special tax rules.
The tax treatment of cryptocurrency transaction, like any economic activity, will depend on the actions and the parties involved. Every case should be based on its own facts and circumstances. Since there is no specific legislation for the tax treatment of cryptocurrencies, one has to look at both the basic tax principles and Revenue guidance to determine the tax treatment that should apply.
Trading or Capital
If a company is acquiring and selling cryptocurrencies, then it should be determined whether that company is involved in cryptocurrency trading or not. Companies engaged in the buying and selling of cryptocurrencies as part of their trade will be subject to corporation tax at a rate of 12.5%.
Whether a trade exists or not is a question combining fact and law; it is a matter of law what “trade” means, but the answer in each case will depend on its particularities. There”s a vast amount of court decisions on what carrying on a trade implies. 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.
If a company’s trade does not involve the trading of cryptocurrency, then the buying and selling of cryptocurrencies will be liable to corporation tax on chargeable gains at an effective rate of 33% on the realisation of any gains on the sale of cryptocurrencies.
If traders accept cryptocurrencies as part of their business, then the profits and losses will flow through to their profit and loss account just as allowing payments in any foreign currency.
VAT treatment of Cryptocurrencies
The Court of Justice of the European Union (CJEU) held in the Hedqvist case (C-264/14) that Bitcoin constitutes a currency for VAT purposes. The CJEU judgement is based on the premise that although a cryptocurrency is not legal tender in any country, it has been accepted by the parties to the transaction as an alternative to legal tender, and has no purpose other than a mean of payment.
It is Irish Revenue’s view that Bitcoin and similar cryptocurrencies are regarded for VAT purposes as “negotiable instruments” and exempt in accordance with Para.6(1)(c) of the Value Added Tax Consolidation Act, 2010.
Therefore, a trader supplying cryptocurrencies to customers within the EU has no obligation to account for VAT on its turnover but correspondingly will have no entitlement to reclaim VAT on costs and expenses incurred in connection with that supply.
Also, financial services consisting of the exchange of bitcoins or other similar cryptocurrencies for traditional currency are exempt from VAT where the company performing the exchange acts as principal (i.e. buys and sells cryptocurrencies acting as the owner of the virtual currency).
VAT on the Supplies of Goods or Services
VAT is due from suppliers of any goods or services sold in exchange for cryptocurrencies. The taxable amount for VAT purposes will be the Euro value of the cryptocurrency at the time of the supply.
VAT on Mining Activities
Income received from cryptocurrency mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes.
Payroll Taxes & Cryptocurrencies
Where emoluments payable to an employee are paid in a cryptocurrency, their value for the purpose of calculating payroll taxes is the Euro amount attaching to the cryptocurrency at the time of the payment to the employee.
Returns to Revenue must be shown in Euro amounts and remittances made appropriately.
Revenue acknowledges that many cryptocurrencies, such as Bitcoin, are traded on a number of exchanges. Unlike shares or commodities, the value of the cryptocurrencies may vary between exchanges. Therefore, there is not always a single “exchange rate” for cryptocurrencies.
Consequently, Revenue expects a reasonable effort to be made to use an appropriate valuation for the transaction in question. Where there is an underlying tax event on a transaction involving the use of a cryptocurrency, there is a requirement in the Tax Code to keep a record of that transaction, which will include any report in relation to the cryptocurrency.
While the Revenue’s clarifications are welcome, it is worth bearing in mind that the tax treatment of virtual currencies is inconsistent internationally. Therefore, where tax is concerned, these are still areas where entrepreneurs and businesses should tread carefully and seek professional advice, especially when more than one jurisdiction is involved.
Joe McCallByrne & McCall, Dublin, Ireland
T: +353 1 612 05 80
Byrne & McCall was established in Dublin in 1989 and since they have been providing business and taxation advice to both domestic and international clients.
Joe McCall is Managing Partner of Byrne & McCall. He is a Certified Public Accountant. His areas of expertise include Tax & Business Advice for companies wishing to set up a business in Ireland and Taxation of Cross Border Transactions.
Published: Spring 2019