Brian Keegan: It's incorrect to regard Bitcoin as the preserve of criminals

Brian Keegan: It's incorrect to regard Bitcoin as the preserve of criminals

A Bitcoin ATM. One recent estimate puts the share of cryptocurrency in illicit use at less than 2% of the total in circulation. Picture: PA

The online cryptocurrency Bitcoin was in the news when, as part of a CAB investigation into the sale and supply of drugs, a man was made to forfeit Bitcoin worth €52m by the High Court.

Bitcoin is just one of several types of cryptocurrency which are widely used to make
payments online.

You can even find Bitcoin ATMs in many countries including Ireland.

Bitcoin is a bearer document for the digital age and can be compared to the most familiar bearer document, a euro note. A euro note has value because a bank has issued it, and its value is attributable to the person holding it. If you lose or forfeit the euro note, you lose the value. If, like the man in the High Court last week, you lose or forfeit digital access to the Bitcoins you own, you lose that value too.

That simplicity also extends to the way Bitcoin investments are taxed. It is treated much like any foreign currency once you get past its digital mystique. When you use euro to buy foreign currency, say US dollars, you are acquiring an asset. You can gain or lose on that asset depending on the relative value of a euro to a dollar when you go to sell it.

The same goes for Bitcoin. Gains are taxable, losses are allowable to offset future gains. When Bitcoin is received as payment in any commercial transaction, the same tax rules which are in place for payments
received in other foreign currencies also apply.

Payment by Bitcoin doesn’t exempt goods or services from Vat, nor allow imports to escape customs duty. Businesses still have to keep records of Bitcoin payments received and must pay tax on profits made from Bitcoin receipts.

So much about Bitcoin is routine. Where it really differs from other types of currency is that it dispenses with the need for an independent institution, like a bank or a credit card company, to verify its issue and use. That makes it tricky for the likes of Revenue or the Criminal Assets Bureau (CAB) to trace, certainly far harder than tracing euro, sterling or dollars which tend to end up somewhere in some bank account to which a tax man or woman can request access.

There is no equivalent type of bank account for Bitcoin savings. They exist in a computer file to which their owner has access, while the record of their validity is registered across multiple platforms on the internet using blockchain technology. That can make Bitcoin a haven for illicit earnings which were derived either from the proceeds of crime or the more mundane but equally culpable tax evasion.

It would be incorrect however to regard the use of Bitcoin and other forms of cryptocurrency as the sole preserve of criminal behaviour. Illegal activity tends not to advertise itself so it is difficult to
accurately gauge the extent to which cryptocurrencies have a role.

One estimate by a US cryptocurrency consultancy Chainalysis puts the share of cryptocurrency in illicit use at less than 2% of the total in circulation. Even if that estimate is on the low side, it does suggest that much of cryptocurrency use is entirely legitimate.

To deal with illicit use, law enforcement agencies may have to think about the ways of tracing Bitcoin-derived activity, for example, by tighter regulation of businesses which convert Bitcoin to and from the more traditional currencies.

The High Court action suggests that they are making progress and that perhaps Bitcoin is no longer a safe haven for some illicit earnings.

Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

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Wednesday, October 27, 2021

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