Consistent with tax authorities’ recent push to catch up with innovations in the digital economy, the Irish Revenue Commissioners has issued fresh guidance on the tax treatment of cryptocurrencies (commonly referred to as virtual currencies) and peer-to-peer (P2P) lending.
These two pieces of guidance are summarised briefly here.
In an eBrief issued in May 2018, the Revenue explained that, generally, normal tax rules apply to activities where cryptocurrencies are involved. That is, the Revenue doesn’t intend to create a bespoke tax framework.
The exact tax treatment of transactions involving virtual currencies depends on the activities and parties involved.
For businesses that accept payment for goods or services in virtual currencies, there are no changes; the rules concerning when revenue is recognised and how taxable profit is calculated remain the same for direct tax purposes.
Businesses are required to maintain records of any transactions involving cryptocurrency where there is an underlying tax event.
For non-incorporated businesses, profit earned or losses incurred from virtual currency trading should be reflected in the taxpayer’s accounts for income tax purposes. Such will be taxable under the normal rules.
For companies, the normal corporate income tax rules apply; profit or loss from virtual currency transactions should be reflected in their accounts. However, cryptocurrencies are not a “functional currency” for the purposes of preparing tax accounts. This means that accounts for a company with substantial virtual currency holdings will still need to prepare tax accounts in euros or another allowed functional currency.
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On capital gains tax, the eBrief notes that if a profit or loss on a currency contract is not within trading profits, it would normally be taxable as a chargeable gain or allowable as a loss for corporate tax or capital gains tax purposes.
It stipulates that gains and losses incurred on cryptocurrencies are chargeable or allowable for capital gains tax if they accrue to an individual or, for corporate tax, on chargeable gains if they accrue to a company.
On virtual currencies’ value-added tax treatment, the eBrief sets out the Revenue’s position that they should be treated as "negotiable instruments", which are exempt from value-added tax where the company performing the exchange "acts as principal" – where they buy or sell virtual currency as the owner of that virtual currency, rather than on behalf of another.
Where a company accepts virtual currency in exchange for the goods or services they offer, VAT should be charged in the normal way on those supplies. The taxable amount for VAT purposes is the euro value of the cryptocurrency at the time of the supply.
Finally, income derived from the "mining" of new units of cryptocurrencies – how virtual currencies are created, generally by solving complex algorithms – will generally be outside the scope of VAT, as such is not considered an economic activity for VAT purposes.
Withholding Tax Rules For Crowdfunding
Also in May 2018, the Revenue published a new Tax and Duty Manual section dedicated to clarifying the withholding tax rules for interest paid by companies for finance raised via peer-to-peer lending channels (so-called crowdfunding), and also of the tax treatment of interest earned by a company or individual who has offered funds through P2P lending or crowdfunding to a company or non-resident entity.
Existing legislation requires the deduction of income tax at the standard rate from annual interest paid by companies, or by a person lending to another person whose usual place of abode is outside of Ireland.
The guidance also clarifies the tax obligations of borrowers, stating that a company paying interest on finance raised via P2P lending or crowdfunding is obligated under existing legislation to withhold income tax at the standard rate of tax on interest payments on the funds raised.
While the Revenue’s clarifications are welcome, it is worth bearing in mind that the tax treatment of the P2P economy and virtual currencies is inconsistent internationally, especially with regards to cryptocurrencies. Therefore, where tax is concerned, these are still areas where entrepreneurs and businesses should tread carefully and seek professional advice, especially when more than one jurisdiction is involved.