The number of queries we receive in relation to the taxation of cryptocurrency (or crypto) is increasing rapidly. In this article, I will try to give an overview of what cryptocurrency is and explain how typical crypto transactions are taxed in Ireland.
The only guidance on the taxation of crypto in Ireland is a three-page Revenue Commissioners manual, last updated in April 2020. The crypto world moves at lightning speed and a crypto manual can become outdated in two years. Several of the most common crypto transactions are not covered in this manual. I will attempt to give my view on how these transactions are taxed using first principals of taxation. However, it should be noted that these are my views and should not be relied upon as tax advice. Revenue could and probably would question my views.
Cryptocurrency – What is it?
Cryptocurrency is often misunderstood as the whole Blockchain technology space. However, crypto is just the first and most common use of Blockchain technology. Other use cases are emerging quickly such as:
- NFTs (Non-Fungible Tokens)
- DAOs (Decentralised Autonomous Organisations)
- Royalty Payments Tracking
- Voting Mechanisms
- Operating systems
However, cryptocurrency’s such as Bitcoin (“BTC”), Ether (“ETH”) and Solano (“SOL”) are the first and most common uses of blockchain technology.
It remains to be seen whether any cryptocurrency will become a currency. Currencies are stores of value and mediums of exchange with the following characteristics:
In general, cryptocurrencies (such as Bitcoin) satisfy the first 5 characteristics but lack acceptability. Bitcoin is now legal tender in El Salvador, and it will be interesting to see if any other countries follow to increase its general acceptability. It’s not difficult to see a world where Bitcoin is a universally accepted currency. However, that is still some distance away and it is looking increasingly likely that Bitcoin is moving towards a store of value such as gold rather than currency.
The likes of ETH and SOL are different to Bitcoin in that these cryptocurrencies exist on an operating system where apps can be built on the network. The relevant crypto is the currency of that operating system. Should any of these operating systems grow into mainstream use, then it is likely that the currency of that operating system becomes a widely accepted currency. However, even the most developed blockchain operating system (Ethereum) is still quite difficult to use and has some major issues such as gas fees (transaction fees).
It is important to realise just how many multimillionaires and even billionaires there are through cryptocurrency. The industry peaked recently at a combined value of over $3 Trillion (currently $1.7 Trillion). Therefore, there are a lot of wealthy crypto enthusiasts looking for ways to spend it (without converting to the non-crypto world) which can lead to adverse tax consequences.
This can partly explain the bubble-like effect in the NFT (digital art) market during 2020/2021 which saw digital artist Beeple sell a piece of art in March 2021 for $69.3m through mainstream art auction house Christies. This made it one of the highest art sales of all time and the purchase was made through ETH. Funnily, Beeple immediately exchanged his ETH for USD.
This leads onto the next question:
How are Crypto Transactions Taxed in Ireland?
Capital Gains Vs Income/Business Tax
The capital gains tax (“CGT”) rate in Ireland is 33%. Cryptocurrency is no different from any other asset you buy, sell or transfer. A simple example of how CGT applies outside of the crypto world is through buying and selling a house. Take for example if you purchase a holiday home for €200k and sell it 5 years later for €300k – the €100k capital gain would be subject to CGT at a rate of 33% (i.e. €33k of CGT).
This same concept holds true for crypto. The difference with crypto is that many holders constantly change between their crypto holdings. For example, you might buy €10k of Bitcoin, then exchange it one year later for ETH, then one year later exchange it for SOL. Each of these transactions could be subject to CGT. Therefore, you should be very careful when transferring between different cryptos. CGT does not just apply when you transfer back to a Fiat currency (i.e. Euro, USD).
Please note that there is no CGT on your first €1,270 of capital gains each year.
If you constantly “trade” crypto, then your trades could be classed as ‘trading’. As with trading in shares, the threshold to be considered trading is relatively high – the operation must show substantial frequency in transactions, organisation and sophistication. If this is the case, the business could be taxable in one of two ways (as opposed to CGT):
- If incorporated as a company, could be subject to corporation tax at 12.5%; or
- If unincorporated, the business could be subject to income tax at up to 55%.
Please note that the tax would only be paid on profits (i.e. a tax deduction for expenses would be allowed).
There are many ways to make passive income from your crypto or within the blockchain space primarily through DeFi (Decentralised Finance), these include:
• Yield Farming
• Play to earn games
• Running Nodes
• Cashback on crypto card payments
It should be noted that if you make more than €5k in passive income (or non-PAYE income) in any given year, you should be registered with Revenue to file an income tax return.
Crypto can be “staked” i.e. given to another person as a loan in exchange for staking yield. This would be like peer-to-peer lending in the non-crypto world.
Staking yield should be subject to income tax and taxable at a rate of up to 55%. The amount earned should be disclosed to Revenue annually with the tax paid.
Yield farming is one such investment strategy in DeFi. It involves lending or staking your cryptocurrency coins or tokens to get rewards in the form of transaction fees or interest. This is like earning interest from corporate bonds or interest on deposits in a bank; you are technically lending money to the company.
Yield Farming revenue should be subject to income tax and taxable at a rate of up to 55%. The amount earned should be disclosed to Revenue annually and tax paid.
Crypto users that frequently interact with new and existing platforms will likely receive an airdrop at some stage. Airdrops involve blockchain-based projects and developers sending out free tokens to members of their communities as part of a broader marketing initiative.
It should be noted that Airdrops can have significant value and often be worth €10k+.
Given that there is no guidance from Revenue on the taxation of Airdrops, it could be seen to be taxed in one of several ways:
- As a bonus share issue – if this is the case, the receipt of the tokens could be tax free but would result in 33% CGT on sale (most likely in my opinion)
- As a gift – subject to gift tax at 33% if above €16,250 (accumulated amount over the course of your life)
- Prize Money – similar to winning a competition, the receipt of tokens should be tax free. However, the follow on sale will likely be subject to CGT at 33%.
The sale of the tokens should be a CGT event. In this regard, Revenue may argue that your base cost is nil leading to a CGT cost of 33% on sale. Therefore, each of the above would lead to a similar tax liability.
Play to Earn Games
There is a growing gaming industry within the blockchain space. Games usually have their own token within a game and offer rewards for length of time played. This is not too dissimilar from an online casino. Gaming rewards in the gambling space would not be taxable. However, it should be noted that the amount and frequency in which you earn gaming rewards should be considered before deciding on the tax treatment. It is likely that it could be seen to be business/trading income if it is regular income of a professional player.
Bitcoin mining is the process by which the Bitcoin blockchain is secured with the miners being rewarded with Bitcoin. Bitcoin miners use powerful computers to complete complex mathematical functions.
Given the sophistication in the Bitcoin Mining market, it is unlikely that any one person is mining Bitcoin at home. Therefore, it would likely be a business and could be taxable as corporation tax (if incorporated) or income tax (if unincorporated).
Running a node means using spare computing and bandwidth to help secure a blockchain network. For example, running a Bitcoin node is similar to mining. However, there are no block rewards for running a Bitcoin node. Therefore, there should be no taxation for running a node if there is no reward. If there is a reward, it could be taxed similar to mining (if a commercial venture) or as passive income if it is ad-hoc.
Cashback on Crypto Card Payments
Visa cards such as cards issued from Crypto.com offer cashback rewards of up to 8% on everyday expenses and paid subscriptions to streaming services such as Netflix, Spotify and Amazon Prime. The key here is that the “cash” back is actually paid as a Euro equivalent in the Crypto.com token, CRO.
Cash back rewards on standard non-crypto credit cards would not be subject to Irish tax (i.e. it is a discount on the price paid). Therefore, it is unlikely that cash back in CRO would be subject to Irish tax.
This transaction is complicated by the exchange between Euro (for the purchase) and CRO (for the reward). Given that you must then sell your CRO token, the question is, what was the cost of your CRO for CGT purposes? It could either be the price of CRO when the cashback was made or nil. Clearly the former would be more beneficial for users, however, I think Revenue would argue the cost of purchase was nil leading to a CGT charge on sale of CRO at 33%
As you can tell from the above, the taxation of crypto transactions is not straight forward. The above is solely my view, and it should not be relied upon as tax advice. I would welcome updated guidance from the Revenue Commissioners on such transactions.
Please get in contact if you have any questions, I would love to hear from other crypto enthusiasts.
Senior Tax Manager