Cryptocurrencies and tax: what do I have to pay and when?

Q&A: It’s been a boom year for crypto but investors need to be wary of swings and limited regulation

I have invested in cryptocurrencies and I have a few questions about what my position will be with taxes. Fortunately I’m not in that position where I am at a huge loss but I have invested in some early-stage coins/tokens via the Revolut App and some of them are up and some are down.

My current investment is about €100-€110 and will possible be increasing as time goes on.

Is it an issue if I hold on to the investment for an extended period of time (years) hoping for an increase ? Does that open me up to tax issues or is it only when I sell and make a profit ?

Do I need to report any loss/gain I make this year if it is under the €1,270 limit ?

Mr A.G., email

It seems apposite for the year that’s in it to end with a question on cryptocurrencies. In investment terms, they have been the hottest item of the year.

According to industry figures from earlier this year, there were up to 7,812 different cryptocurrencies out there – ranging from the very specific and tightly held to those touted for broader investment – worth a total of $325 billion.

And most of them appear to have done very well over 2021. However, even in the good times, they are prone to wild swings in valuation and there remains significant concern about how they can be regulated, if at all.

The Revolut app allows investors tap into more than 30 of these including the big guns – bitcoin and ethereum – for an investment of as little as $1, it says.

There is no issue in holding on for these investments for as long as it suits you. You will not face any tax bill unless you sell these crypto holdings

Sensible investors have probably contented themselves with dipping a toe in the water – as you appear to have done. No doubt some crypto disciples will note how failure to go “all in” has led to you missing out on significant gains ... and they’re right but, given the Wild West nature of the crypto market, you very much want to be playing with money you can afford to lose.

It says something that, even after the year we have had, you are at a modest loss. It just illustrates how the huge swings in price can leave two very similar investors with two very different outcomes.

Capital gains tax

Anyway, on a more practical level, as an investor in cryptocurrency, the tax you need to worry about is capital gains tax which is levied on crystallised gains of more than €1,270 in any year at a rate of 33 per cent.

The key word here is "crystallised". Apart from investment funds which have a separate exit tax regime that kicks in every eight years – regardless of whether you continue to hold the assets or not – direct investment in assets such as cryptocurrencies means you do not have to worry about tax until you go to sell the asset.

In relation to your questions specifically, what that means is that there is no issue in holding on for these investments for as long as it suits you. You will not face any tax bill unless you sell these crypto holdings – assuming you are back in profit at that time.

When you do sell, you will have to assess the capital gain. This is the difference between your original purchase price and the sale price. From this gain, you are allowed to deduct any expenses directly involved in buying or selling the holdings - such as brokers’ fees.

So even where you owe no tax because your gain is less than €1,270, you'll have to declare and file for the transaction

If you don’t make a profit, no tax will be due, even if the cryptocurrencies could have been sold at a profit at an earlier stage of your ownership; it is only the situation at the start and end points of your ownership that are relevant.

Also, if you eventually sell out at a loss, you can use that loss to offset gains on the sale of any other assets in the same year, potentially reducing or eliminating a capital gains tax bill on other gains.

Making a return

And, if you have no other gains or you are still left with an outstanding loss at year end even after offsetting against gains, you can carry that loss forward and set it against future gains until it is fully wiped out.

When you do eventually sell the cryptocurrencies, you will have to make a return. This can be done on a capital gains tax form – CG1. It states specifically that “the obligation to make a return exists even where no tax is due because of the use of reliefs or allowable losses”.

So even where you owe no tax because your gain is less than €1,270, you’ll have to declare and file for the transaction.

For clarity, the €1,270 allowance applies only in the year where you sell at a gain. It’s irrelevant if you make a loss and it is not something you can “bank” during each year of ownership and then consolidate for bigger relief when you sell.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.