Investing in cryptocurrencies - what does the taxman need to know?
In as little as five years from the low point, Bitcoin has increased in value by a factor of 20 times, writes tax advisor Kieran Coughlan.
All that glitters isn’t gold as the old adage goes. When it comes to cryptocurrency, the rise of Bitcoin and, more recently, the Donald Trump Coin, the Melania Trump coin, and other “coins”, such as the DOGE coin and XRP, have made millionaires out of early adopters. But for many discerning investors, the risks outweigh the upside potential choosing instead to stick to the sidelines.
The risks with digital assets include an overpopulation of cryptocurrencies, the hacking of blockchain or digital wallets where such digital currencies are stored or the failure to get the currency recognised by mainstream regulators, central banks and retailers.
At launch, the coin was initially selling for less than $7 per share, increasing ten times within 24 hours and having steadied out over the past few days at a much lower $17-$19 range. Now, to be crystal clear, this column doesn’t proffer any investment advice, and whether you wish to engage in buying crypto assets or not is entirely your own choice, and a choice that should be fully informed.
From my own perspective, it smacks of the gold rush, the canal companies and the railway company investments of more than 150 years ago. In fact, if you go back practically, each generation has had its own bubble.
The stock market crash of the 1920s, the housing bubble of the Celtic Tiger era, the Dutch tulip mania of the 1630s, the original Ponzi scheme, and the Time Share holiday apartment scandal of the 1980s, which affected our neighbours in the UK, are all examples of over-enthusiastic speculation which are familiar to us.
At the rate that new cryptocurrencies are being added, and more especially given the lack of regulation and the non-existence of underlying assets, one has to wonder if cryptocurrencies are just a bubble.
The sale, transfer, or redemption of crypto-assets is most likely to be a disposal for CGT purposes unless, based on the facts and circumstances, there is a trade of dealing in crypto-assets being carried on in which case the transactions may be subject to income tax or corporation tax.
A trade in this context would be more aligned to the meaning of an occupation as opposed to trading in the buying and selling of crypto. For the majority of investors their dealings in cryptocurrencies will be liable to capital gains tax with gains liable to capital gains tax at 33%, and losses on transactions available for offset within the year or carry forward against other gains of future years.
Capital gains tax losses are not available for offset against income tax, and special rules prohibit the offset of losses on connected party transactions against other gains. Detailed records should be kept as capital gains need to be worked out based on each trade.
For persons who are income tax registered, the declaration of capital gains forms part of the income tax return, usually filed before mid-November each year. For PAYE workers, the capital gains details are submitted to Revenue on a Form CG1.
The payment of capital gains should be made by December 15 for gains within the year from January to November, and paid by January 15 of the following year for gains made in the month of December.
The key point here is that the payment of tax should occur at an earlier time than the actual filing of the tax return.
- For more detailed guidance on the tax implications, check out Revenue’s Taxation of Crypto-Asset Transactions guidelines.
