Brian Keegan: All is changed as cryptocurrencies catch the eye of tax authorities 

Ireland's Revenue Commissioners have turned their attention to the tax implications of cryptocurrencies such as Bitcoin

Cryptocurrency differs from other types of currency by dispensing with the need for an independent institution like a central bank to verify its issue and control its supply.

Even though they have been around for well over a decade, cryptocurrencies still have something of a mystique about them. For many of us, the workings of the likes of Bitcoin are still poorly understood. 

However, a sure sign of the success of any venture is when the tax authorities turn their attention towards it. The Revenue Commissioners have recently updated their guidance on how profits and gains involving cryptocurrencies should be taxed.

The main point about the taxation of cryptocurrency transactions is that it is not really any different from the treatment of transactions made in any other currency. When you use euro to buy foreign currency, say pounds sterling, you are acquiring an asset. You can gain or lose on that asset depending on the relative value of euro to pounds when you go to sell them. Gains are taxable, losses are allowable to offset future gains.

Treating Bitcoin as an investment is not what its inventors apparently intended back in 2009. File picture: Kin Cheung/AP

Tourists don’t usually fall into a tax trap on foreign exchange because small gains of up to €1,270 each year are exempt. The same goes for a cryptocurrency like Bitcoin (and there are many other cryptocurrencies available).

Treating Bitcoin as an investment is not what its inventors apparently intended back in 2009. The original white paper which proposed the system set out “a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution”. Bitcoin was supposed to take financial institutions out of the payment loop.

Where cryptocurrency really differs from other types of currency is that it dispenses with the need for an independent institution like a central bank to verify its issue and control its supply. That makes it tricky for the Revenue or the Criminal Assets Bureau to trace, certainly far harder than tracing euro, sterling, or dollars which tend to end up somewhere in some bank account to which the police or fiscal authorities can request access. Receipts and payments using cryptocurrency are not exempt from tax, Vat should be charged, and the normal rules for calculating tax liabilities apply.

The lack of a centralised control also means that cryptocurrencies can be convenient tools for money laundering, blackmail, drug purchases, terrorists, and bogus investments. It would be incorrect however to regard cryptocurrency use as the sole preserve of criminal behaviour. 

Its use is becoming more mainstream, prompting calls by regulators and politicians for more oversight.

Brian Keegan, director of public policy at Chartered Accountants Ireland

The EU is developing regulations to do with the transfer of funds which reportedly would require cryptocurrency issuers to apply more identity checks on their customers, and more tracking and tracing of transactions.

Late last month Sergio Panetta, who is an executive director of the ECB and thus commands an audience on monetary matters, pointed out that the energy consumption to support computed infrastructure which makes cryptocurrency work is roughly equivalent to the energy consumption of Belgium.

Redressing the environmental impact of that level of consumption led Mr Panetta to suggest that “appropriate taxes” should be levied on the issuers, investors and service providers of cryptocurrencies. The subtext here is that because the convenience of cryptocurrency is so attractive, the ECB should be getting its act together in issuing its own form of “digital euro”.

The debate over cryptocurrency regulation and taxation will rumble on, but for the time being, all the normal rules applying to any foreign currency continue to apply.

• Brian Keegan is director of public policy at Chartered Accountants Ireland