A common misconception among crypto traders is that blockchain transactions are anonymous and cant be traced, so there’s no need to pay tax. Fact is, if Revenue finds even a single transaction belonging to you, they can easily trace out your entire transaction history. Transparency – not privacy – is what blockchains are all about.
UK’s HMRC recently sent out notices to 3 top crypto exchanges demanding info on their users and there’s nothing stopping Revenue from doing the same. In Ireland, crypto investments are treated just like investments in stocks or shares. In other words, if you’re making profits (or losses) through the disposal of your cryptocurrency — whether by selling, gifting or exchanging — you need to pay a 33% Capital Gains Tax (CGT).
The deadline for filing CGT is at the end of this month. So, if you’re not sure how crypto taxes work or how to calculate them, here’s a fast crash course to get you going.
The paperwork: What you need to file
You have to fill out different forms depending on your situation. If you are a PAYE (Pay as You Earn) individual, you will have to file a CG1 Return. If you’re self-employed, you need to fill out Form 11. A confusing detail about capital gains taxes in Ireland is that they have to be paid in the same year that the gains were made but are declared in the following year.
As if that’s not enough, capital gains also have to be calculated for two separate periods. If you sell/exchange/gift crypto between 1st January to 30th November, you need to pay the tax by 15th December of the same year. For disposals between 1st to 31st December, you will have to pay Capital Gains Tax by 31st January of the following year.
Note that not making any profits during a year does not relieve you of your filing obligations. You have to submit your capital gains forms as long as you took part in a taxable activity irrespective of the outcome. If you neglect declaring taxes for a year, you will also have discrepancies in your declarations for the following years.
It’s also worth mentioning that you will have to submit a lot of details when you file your tax returns. This includes things like sales proceeds, date of sale, cost of acquiring the asset and so on. If you have a number of transactions throughout the year, this can get overwhelming so make sure you keep a proper log of all your transactions. If you haven’t been doing that so far, you can also use crypto tax software to help with this.
Remember to deduct your losses and expenses
If you made a loss on any crypto transactions during the year, you can use the loss to offset capital gains you made from any other transactions. In fact, you can even use these losses to offset gains that are made in later years. This is a surefire way of reducing your taxable gains.
Aside from losses you are also allowed to deduct a range of expenses to further reduce the taxable gains:
- The purchase price of the asset (obviously), adjusted for inflation
- Expenses related to facilitation of the transaction— eg. exchange fees
- Mining expenses, including the cost of acquiring specialized hardware, software, and an encrypted online wallet
If you have a lot of trades you may find it difficult to assess the purchase price of a sold asset. Revenue requires you to use FIFO (First In First Out) to calculate the purchase prices i.e. the asset that was bought first is also the first one to go. There is however a special provision for assets that are sold within 28 days of purchase. For ex. if you bought 20 Bitcoins for €50,000 last year then bought another 10 Bitcoin for €100,000 a few days ago and now sell 10 of your Bitcoins for €120,000, your gain will be €20,0000 and not €70,000 as you might think.
Haven’t declared crypto taxes in previous years?
If you haven’t paid any taxes on crypto gains in the last few years, you still have time to make things right. Instead of waiting for Revenue to start an investigation, simply make an unprompted qualifying disclosure.
As part of this disclosure, you need to include complete details of all the investments along with the unpaid taxes plus the interest accrued (the rate of statutory interest for tax debts is 2%). You should ideally include the amount payable with the disclosure, although it’s also okay to pay it in instalments. Revenue may also decide to impose some penalties as part of the settlement which will depend on the amount of tax due, the nature of your error, and how much you co-operative. Naturally, if the disclosure is unprompted, the penalty is likely to be waived.
Given that the deadline is looming, it’s time to get your affairs in order and make sure you have everything you need to file your returns. If you’re still confused or require any additional guidance, you may want to hire a tax accountant that specializes in cryptocurrencies. This may be an expensive option but is likely pay for itself in the amount of taxes it saves you.