Crypto assets — which include cryptocurrency — may not have a physical existence anywhere but they are subject to capital gains tax in the same way as real-world assets. “They are not just currencies, they are assets,” explains Mazars tax partner Alan Murray.
The Revenue Commissioners recently issued a guidance document which indicated that these assets will be taxed in the same way as normal physical assets.
“If you buy shares in a company and sell them at a profit you will pay capital gains tax [CGT] on it at the 33 per cent rate,” Murray points out. “What Revenue is saying is that the rules are the same for crypto assets as they are for shares or property or anything else. One caveat to that is that, if you are dealing in shares, you are liable to income tax the same as for any other trade.”
So far, so straightforward. Where it gets interesting is when the rules are applied to people with non-domicile status. These are people who are not Irish but are living here and have their domicile in another country. They are liable for tax on the remittance basis, which means they are taxed in Ireland only on their Irish sources of income and on foreign income that they bring into Ireland.
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“If you are a non-domiciled person who is tax resident in Ireland and sell shares in a foreign company, and don’t bring the money back to Ireland, you are not liable for tax here,” says Murray.
For example, if a non-domiciled woman working for a multinational firm in the midlands sells a property in her home country at a profit, she will not be liable for Irish tax on it if she keeps the money out of Ireland. On the other hand, she may run into some difficulty if she makes a profit on the sale of crypto assets.
“The problem is proving where it is located,” Murray notes. “That’s due to the stateless nature of crypto assets. They aren’t held in any physical location. If that non-domiciled woman in the midlands buys €100,000 worth of crypto assets through an agent in Hong Kong and later sells it at a profit, she will pay CGT at the full rate on the gain unless she can prove the assets are located outside of Ireland.
“What Revenue is saying is that if the non-domiciled taxpayer can prove the crypto assets are not located in Ireland, they may not have to pay tax on gains. But that’s really, really difficult to prove.”
That’s due to the very nature of crypto assets. Murray explains that when you buy crypto assets, you get a private digital key to prove ownership on the blockchain, which is a global decentralised ledger. “That key is really the only thing there is. There aren’t many custodians who will keep crypto assets. And even if a custodian can say they keep the private key for you in say, Jersey, that may not be proof enough.
“There is still an argument that, regardless of where the private key is held, you are still the beneficial owner and the asset itself does not exist where the key is located — that’s the whole nature of decentralised finance. You could almost say it is everywhere and nowhere.”
He advises non-domiciled individuals to take care. “They may assume that they are not liable for Irish tax on gains made on crypto trading, but that is not necessarily the case.”
Of course, that particular taxation blade cuts both ways. “It will be interesting if a plethora of capital losses come about after the falls in cryptocurrency values this year. If you tax the gain, you have to allow the loss.”
There might be some instances where the location of the asset could be proven, but again there is doubt. “Maybe if the crypto asset is part of a pooled fund, there is an argument there,” says Murray. “But there is a myriad of legal issues which could come into play there. Tax law determines how things are treated for tax purposes, such as where shares are located for CGT purposes, but if something is not specifically mentioned, you have to go back to general law.
“It will probably only be when cryptocurrencies are regulated that you will get answers to questions like that. Regulation will probably take some of the gloss off them as well. I have some sympathy for the tax authorities. It’s hard to get your head around an asset that only exists in cyberspace. It is not like other assets.”