Tax on Bitcoin Profits

nate.drake

It doesn't seem there's a legal loophole if you trade your Bitcoins for something other than currency such as shares or gold bullion:

You have to pay CGT on gains made from the sale, gift or exchange of an asset such as:

• land
• buildings (houses, apartments, or commercial property)
• shares in companies (Irish-resident or non-resident)
• assets that have no physical form such as goodwill, patents and copyright
• currency (other than Irish currency)
• assets of a trade
• foreign life insurance policies and offshore funds
• capital payments (in certain situations).

Source : http://www.revenue.ie/en/gains-gifts-and-inheritance/transfering-an-asset/what-do-you-pay-cgt-on.aspx

TLDR: If I give you gold bars in exchange for your Bitcoins, you may still be liable for CGT.

makeorbrake

Can sell direct - peer to peer - if anyone wants to make a bitcoin purchase. (feel free to pm me).
Or buy for that matter.

Flossy Flossy

There is no tax on gambling, betting on the price change through a spread betting service like IG Networks is a legal method to benefit from the appreciation of Bitcoin.

IG is one of the biggest spread betting services, they are super risky and morally very questionable but worth noting.

gmcdaid

AndrewJRenko wrote: »

Try spending more than €10k cash on any car or artwork or other asset and you'll see exactly what records will end up with Revenue.

What will the vendors who accept bitcoin report to Revenue? The same as they report to Revenue when you pay cash - the ID of the seller, a verified ID for large purchases and the details of the purchase.

And even if you ignore all that stuff, you may well be flagged up for Revenue audit simply as an exception. If you have a €900k house when most other people with your level of declared income have a €500k house, you could well be flagged up. If you have an €50k car when most other people with your declared level of income have a €20k car, then you may well be flagged up.

What are you talking about? Vendors of goods and services are not required to report anything to the RC. You seem to be living in some sort of dystopian fantasy world.

AndrewJRenko

gmcdaid wrote: »

What are you talking about? Vendors of goods and services are not required to report anything to the RC. You seem to be living in some sort of dystopian fantasy world.

This kind of dystopian fantasy world, perhaps?

http://www.antimoneylaundering.gov.ie/website/aml/amlcuweb.nsf/page/high_value_goods_dealers-en

gmcdaid

AndrewJRenko wrote: »

This kind of dystopian fantasy world, perhaps?

Yes, they're required to keep records.

You made it sound like they have to file a report with the RC every time somebody buys a 2nd hand car.

AndrewJRenko

gmcdaid wrote: »

Yes, they're required to keep records.

You made it sound like they have to file a report with the RC every time somebody buys a 2nd hand car.

They're required to keep records AND to file a report for any suspicious transactions

cnocbui

My personal view is it boils down to this:

If your profits are not on a level as to be life-changing, pay the CGT.

If your profits are life-changing, move to another country and realise your profits and live out from under one of the most onerous tax regimes in the world. Win, win, win. Just make sure not to leave any assets behind.

So stay and pay or move. Wherever you move to would want to have a low-lower CGT obligation, of course.

So comply with your tax obligations, but there are legal ways to change what those obligations are.

h0neybadger

What if...

I run some hardware to mine bitcoins.

I sell my coins each month, and this covers my running costs, electricity, premises rental etc.

Do I still pay capital gains if I do it through a registered business?

Peregrinus

h0neybadger wrote: »

What if...

I run some hardware to mine bitcoins.

I sell my coins each month, and this covers my running costs, electricity, premises rental etc.

Do I still pay capital gains if I do it through a registered business?

CGT is calculated on the same basis for individuals and companies.

The way to avoid CGT on the gains made on disposal of assets is to engage in the activity of acquiring and disposing of assets with such scale, system, method and regularity that the Revenue will accept that this is not an investment activity, but a trade. (You may buy paintings, say, as investment, but an art dealer buys them as stock-in-trade.) If the Revenue can be persuaded that you are trading in bitcoins, then your earnings from the activity will not be subject to CGT but will be subject instead to income tax as the profits of your trade.

(Note that this normally results in a higher tax liablity, not a lower one, so the argument is usually the other way around - the Revenue insisting that the taxpayer is carrying on a trade, the taxpayer saying, no, this is just a serious of investment transactions.)

ZeroThreat

Peregrinus wrote: »

CGT is calculated on the same basis for individuals and companies.

The way to avoid CGT on the gains made on disposal of assets is to engage in the activity of acquiring and disposing of assets with such scale, system, method and regularity that the Revenue will accept that this is not an investment activity, but a trade. (You may buy paintings, say, as investment, but an art dealer buys them as stock-in-trade.) If the Revenue can be persuaded that you are trading in bitcoins, then your earnings from the activity will not be subject to CGT but will be subject instead to income tax as the profits of your trade.

(Note that this normally results in a higher tax liablity, not a lower one, so the argument is usually the other way around - the Revenue insisting that the taxpayer is carrying on a trade, the taxpayer saying, no, this is just a serious of investment transactions.)

It's more difficult for the revenue vultures to claim that making a few 10ks from Bitcoin is a trade if someone is a PAYE worker in full time employment and just does this in their own free time on the side.

barneystinson

ZeroThreat wrote: »

It's more difficult for the revenue vultures to claim that making a few 10ks from Bitcoin is a trade if someone is a PAYE worker in full time employment and just does this in their own free time on the side.

Because no-one with a day job also carries on a self employed trade? :rolleyes:

It's unlikely that Revenue would argue someone making gains from Bitcoin was engaged in a trade, but not for that reason.

cnocbui

h0neybadger wrote: »

What if...

I run some hardware to mine bitcoins.

I sell my coins each month, and this covers my running costs, electricity, premises rental etc.

Do I still pay capital gains if I do it through a registered business?

I would have thought CGT has nothing to do with this scenario, since you are not acquiring an asset and then disposing of it, you are 'mining' it, or more accurately; being paid for your efforts. The Bitcoin should be treated as income so tax would be on income less expenses and capital depreciation.

Peregrinus

cnocbui wrote: »

I would have thought CGT has nothing to do with this scenario, since you are not acquiring an asset and then disposing of it, you are 'mining' it, or more accurately; being paid for your efforts. The Bitcoin should be treated as income so tax would be on income less expenses and capital depreciation.

Mmm. I don't pretend to understand fully exactly what is involved in mining bitcoins, as opposed to just buying them, but based on my rather limited reading on the subject I think you could probably run the argument that mining bitcoins is, if not a trade, at least "an adventure in the nature of a trade", and so the earnings are liable to income tax, not CGT.

However, as noted, being liable to income tax rather than CGT usually results in a greater liablity for the taxpayer, not a lesser, so I doubt if very many taxpayers are arguing the case. And I'm not aware that the Revenue are pushing it.

cnocbui

Peregrinus wrote: »

Mmm. I don't pretend to understand fully exactly what is involved in mining bitcoins, as opposed to just buying them, but based on my rather limited reading on the subject I think you could probably run the argument that mining bitcoins is, if not a trade, at least "an adventure in the nature of a trade", and so the earnings are liable to income tax, not CGT.

However, as noted, being liable to income tax rather than CGT usually results in a greater liablity for the taxpayer, not a lesser, so I doubt if very many taxpayers are arguing the case. And I'm not aware that the Revenue are pushing it.

It's called mining for a reason. You purchase and operate expensive capital equipment and then do massive computational work with it. You are rewarded, by being given bitcoins in return, so you don't purchase them. This activity consumes a very large amount of electricity, 24/7, so you have significant operating costs. You also require an internet connection, so that too is a cost.

The activity more closely resembles a small business than share trading or the like. Luckily for me, my son is the one carrying out the Etherium mining on the rig in his bedroom, so the tax will likely be nonexistent given his total earnings will be below the threshold.

Peregrinus

cnocbui wrote: »

It's called mining for a reason. You purchase and operate expensive capital equipment and then do massive computational work with it. You are rewarded, by being given bitcoins in return, so you don't purchase them. This activity consumes a very large amount of electricity, 24/7, so you have significant operating costs. You also require an internet connection, so that too is a cost.

Hmm. The power consumption and the internet connection are, I'm guessing, trivial in cash terms. The cost of purchasing the hardware (and software, if there's a cost to that) looks like a capital expense and so isn't deductible in calculating profits. You might be able to claim a capital allowance for it.

cnocbui wrote: »

The activity more closely resembles a small business than share trading or the like. Luckily for me, my son is the one carrying out the Etherium mining on the rig in his bedroom, so the tax will likely be nonexistent given his total earnings will be below the threshold.

It's lucky for your son, possibly, but I don't see how it's lucky for you. Whether it's income or capital gains, any tax liability is your son's; you're not affected one way or the other.

On the assumption that you pay the ESB bill and the internet provider's bill, your son won't be able to claim a deduction for these costs, obviously.

As a matter of interest, when you say you are "rewarded" with bitcoins for doing computational work, who exactly rewards you?

Elessar

Here's a really good breakdown on tax obligations for cryptocurrencies here:

https://www.taxback.com/blog/cracking-the-code-of-irish-cryptocurrency-tax

What I get from it is that if you've ever made a gain or loss from a trade (which lets face it is all of them) you need to declare it, even if you made a loss. So revenue will need details of every single trade you've ever made on any exchange, along with details of associated gains or losses.

What I don't get is do you have to do this only when you transfer gains/losses to your EUR bank account or at all times regardless? i.e. if you have a few €k in coins on coinbase do you need to declare a loss or gain if you sell high and re-buy low, or only when you remove the euro back to your bank a/c?

Peregrinus

Elessar wrote: »

Here's a really good breakdown on tax obligations for cryptocurrencies here:

https://www.taxback.com/blog/cracking-the-code-of-irish-cryptocurrency-tax

What I get from it is that if you've ever made a gain or loss from a trade (which lets face it is all of them) you need to declare it, even if you made a loss. So revenue will need details of every single trade you've ever made on any exchange, along with details of associated gains or losses.

What I don't get is do you have to do this only when you transfer gains/losses to your EUR bank account or at all times regardless? i.e. if you have a few €k in coins on coinbase do you need to declare a loss or gain if you sell high and re-buy low, or only when you remove the euro back to your bank a/c?

You make the gain when you effect the transaction, and not when (or indeed if) you remit the transaction proceeds to your EUR bank account. So, yes, you account for a gain or loss on every transaction.

A tax practitioner can correct me, but I have an idea the Revenue will allow you to apply an average exchange rate when it comes to expressing your gains and losses in euros. So you don't have to value each gain or loss at the EUR exchange rate prevailing on the transaction day; you just sum all your gains and loses for the year and then convert that figure into Euros using the average exchange rate for the year.

AndrewJRenko

Peregrinus wrote: »

A tax practitioner can correct me, but I have an idea the Revenue will allow you to apply an average exchange rate when it comes to expressing your gains and losses in euros. So you don't have to value each gain or loss at the EUR exchange rate prevailing on the transaction day; you just sum all your gains and loses for the year and then convert that figure into Euros using the average exchange rate for the year.

For share trading, the Revenue rules used to require you to pick a consistent approach to currency and stick to it. So you can't pick and choose based on the best outcome for different trades.

cnocbui

Peregrinus wrote: »

Hmm. The power consumption and the internet connection are, I'm guessing, trivial in cash terms. The cost of purchasing the hardware (and software, if there's a cost to that) looks like a capital expense and so isn't deductible in calculating profits. You might be able to claim a capital allowance for it.


It's lucky for your son, possibly, but I don't see how it's lucky for you. Whether it's income or capital gains, any tax liability is your son's; you're not affected one way or the other.

On the assumption that you pay the ESB bill and the internet provider's bill, your son won't be able to claim a deduction for these costs, obviously.

As a matter of interest, when you say you are "rewarded" with bitcoins for doing computational work, who exactly rewards you?

For tax reasons, should it come to that, I would of course -cough - have to charge my son for the electricity consumed and a share of the Internet costs.

It currently takes about 3 months to mine a single bitcoin with the most efficient miner on the market. Most small scale miners join a mining pool and are rewarded/paid their bitcoin from the pool, but strictly speaking, I believe the mining network software pays out the bitcoin on successful completion of a block automatically.

I roughly calculate that it takes about a 1 MW of electricity to mine one bitcon - so about €163 worth of electricity every 3 months with the best gear.

The power consumption and cost of electricity is anything but trivial and is critical to profitability. The main reason my son and I have a miner is to take advantage of the heat produced in the hope this offsets and reduces the amount of heating oil currently needed.

As I said, we are mining Etherium, not bitcoin, using PC GPUs rather than a specialised bitcoin miner.

alb

Peregrinus wrote: »

As a matter of interest, when you say you are "rewarded" with bitcoins for doing computational work, who exactly rewards you?

cnocbui wrote: »

but strictly speaking, I believe the mining network software pays out the bitcoin on successful completion of a block automatically.

Strictly speaking the miner that solves a block includes a transaction in the block that transfers 'newly generated coins' (i.e. coins with no previous transaction history) to themselves. This is called a coinbase transaction (unrelated to the company Coinbase, which named themselves after it) The rest of the network accepts the block and that coinbase transaction if it is valid in terms of the rules of the system.

The best equivalent to this is grabbing a shovel and going into the mountains and digging up some gold. You haven't been awarded it by anyone, you effectively earned it directly yourself. However revenue would treat that gold, is probably how mined bitcoin should be treated.

Peregrinus

cnocbui wrote: »

For tax reasons, should it come to that, I would of course -cough - have to charge my son for the electricity consumed and a share of the Internet costs.

No need for the cough, cnocbui. If the boy is generating 4 bitcoins a year, that's about, what, EUR 13.5K at today's prices? If he's earning that, he can bloody well pay the power bill, which on the figures you give will be about EUR 500.

And, yes, the EUR 5OO power bill is deductible to him.

Lets see: if he earns EUR 13K (after deducting the power bill) tax on that is EUR 2,600. Deduct his personal credit of EUR 1,650 (he doesn't get an employee tax credit because he's not an employee) and his tax payable is 950. He'll also pay USC (since his gross income exceeds EUR 13K); that'll be about EUR 85. Plus class S social insurance at 4%; another EUR 520. So say about EUR 1500, all in.

If the transactions are treated as capital rather than trade, the immediate tax liability is nil, since the transactions are all acquisitions. There'll be no CGT liablity until the bitcoins are disposed of. However, if he disposes of them all in the year he acquires them, and at the current market value, he can deduct the EUR 500 power bill, and the EUR 1,270 annual small against exemption, leaving a net gain of EUR 11,730, and a CGT bill of roughly EUR 3,570. If he staggers the disposal of the coins over several years he can claim the annual small gains exemption more than once, obviously.

h0neybadger

Peregrinus wrote: »

No need for the cough, cnocbui. If the boy is generating 4 bitcoins a year, that's about, what, EUR 13.5K at today's prices? If he's earning that, he can bloody well pay the power bill, which on the figures you give will be about EUR 500.

And, yes, the EUR 5OO power bill is deductible to him.

Lets see: if he earns EUR 13K (after deducting the power bill) tax on that is EUR 2,600. Deduct his personal credit of EUR 1,650 (he doesn't get an employee tax credit because he's not an employee) and his tax payable is 950. He'll also pay USC (since his gross income exceeds EUR 13K); that'll be about EUR 85. Plus class S social insurance at 4%; another EUR 520. So say about EUR 1500, all in.

If the transactions are treated as capital rather than trade, the immediate tax liability is nil, since the transactions are all acquisitions. There'll be no CGT liablity until the bitcoins are disposed of. However, if he disposes of them all in the year he acquires them, and at the current market value, he can deduct the EUR 500 power bill, and the EUR 1,270 annual small against exemption, leaving a net gain of EUR 11,730, and a CGT bill of roughly EUR 3,570. If he staggers the disposal of the coins over several years he can claim the annual small gains exemption more than once, obviously.

would this same principal apply if this was a monthly occurrence?

Say you were mining approx 4 bitcoins a month.
Selling enough to pay electricity cost.
But not selling the rest. Holding out for a rainy day.

What would happen then?

Peregrinus

h0neybadger wrote: »

would this same principal apply if this was a monthly occurrence?

Say you were mining approx 4 bitcoins a month.
Selling enough to pay electricity cost.
But not selling the rest. Holding out for a rainy day.

What would happen then?

On the figures concbui gives, you'd only have to sell about 5% of the bitcoins you mine in order to cover your electricity costs. So you'd be sitting on 95% of them.

It's very hard to argue that that's either a trade or an adventure in the nature of trade. The whole concept of trade pretty much involves buying and selling. I'd say what you're doing there is acquiring assets for long term investment, and you'll have no liability to tax until you dispose of them, and when that happens you'll be liable to CGT, not income tax.

cnocbui

Peregrinus wrote: »

On the figures concbui gives, you'd only have to sell about 5% of the bitcoins you mine in order to cover your electricity costs. So you'd be sitting on 95% of them.

It's very hard to argue that that's either a trade or an adventure in the nature of trade. The whole concept of trade pretty much involves buying and selling. I'd say what you're doing there is acquiring assets for long term investment, and you'll have no liability to tax until you dispose of them, and when that happens you'll be liable to CGT, not income tax.

Revenue are likely to rule you are engaged in a revenue generating enterprise and that you have not purchased any assets and then disposed of them, which is the case. If you hold off on converting your mined bitcoin to fiat in a latter year, the income for that year is going to be very substantial and you could find yourself paying a lot more of your tax at the top marginal rate than if you spread the income evenly over each year.

4 Bitcoin a month is going to cost you at least €39,000 in capital equipment and you would be running an electricity bill of €650 a month for your 4 MW of power.

It's like a gold miner buying equipment, digging up ore, processing and refining it, stacking up the gold bars and then years later trying to argue when he sells them that he should be assessed as having made a capital gain, even though he didn't purchase any refined gold from anyone.

h0neybadger

Actually, figures are approx €55,000 hardware investment.
Monthly electricity costs approx €3,400...

There are variations of hardware available, but the most cost effective ones are too expensive to obtain.
The ones that are available, have a higher monthly cost.

Mining 4 bitcoins a month, requires selling 25% of them to cover electricity costs. So effectively selling 1 bitcoin to make 3.

alb

You can't calculate 'per month' figures that are of any use, because you don't know what the future price of bitcoin will be, or what the future difficulty of mining will be.

cnocbui

h0neybadger wrote: »

Actually, figures are approx €55,000 hardware investment.
Monthly electricity costs approx €3,400...

There are variations of hardware available, but the most cost effective ones are too expensive to obtain.
The ones that are available, have a higher monthly cost.

Mining 4 bitcoins a month, requires selling 25% of them to cover electricity costs. So effectively selling 1 bitcoin to make 3.

I was going on Antminer S9s on ebay at €3200 each and needing 12 of those to generate 4 BTC per month for the 1 MW per bitcoin at €160 per MW.

Anyway, isn't the corporate tax rate 25% for mining? Better than the 33% CGT rate.

barneystinson

cnocbui wrote: »

I was going on Antminer S9s on ebay at €3200 each and needing 12 of those to generate 4 BTC per month for the 1 MW per bitcoin at €160 per MW.

Anyway, isn't the corporate tax rate 25% for mining? Better than the 33% CGT rate.

So the company pays tax at 25%. You the individual still haven't seen a penny personally, and will have to pay further tax on extracting the cash.

h0neybadger

4 Antminer S9's won't generate 4 BTC a month. You'll need closer to 40 of them to do that.