Crypto-assets – Where are they located for tax purposes?

Check out How is cryptocurrency taxed in Ireland?

vIn our previous article, we advised that a chargeable gain arising from cryptocurrency transactions could be liable to Capital Gains Tax (CGT) at a rate of 33% in Ireland. The term cryptocurrency is not defined and although referred to as currencies, they are unregulated and decentralised meaning that the central bank does not guarantee or control their supply.

Why is location important?

The location of the cryptocurrency is important to help determine the correct tax treatment when disposing of crypto assets. This is particularly relevant for individuals who do not have an Irish domicile.

Non-domiciled individuals who are resident or ordinarily resident in Ireland are chargeable to Capital Gains Tax (CGT) on Irish source gains and gains remitted to Ireland. Individuals who have an Irish domicile, and are resident or ordinarily resident in Ireland, are subject to tax on their worldwide gains.

The remittance basis of tax can be hugely beneficial because, as a non-domiciled and resident/ordinarily resident individual, as long as you do not remit your foreign gain into Ireland, the Irish Revenue should not impose Irish CGT.

What is a foreign gain?

A foreign gain is a gain arising from an asset that is situated outside Ireland. If you are non-domiciled, you may be forgiven for concluding such gains may not be subject to Irish CGT on the basis that your crypto-asset is held ‘on the cloud’, and on the face of it does not appear to be remitted into Ireland. Unfortunately, it is not that straightforward.  

The View of the Irish Revenue

As a general statement, the cloud has no physical location and crypto-assets are essentially designed to not have a location. However, for the purposes of taxing rights, in particular, where the remittance basis of taxation is relevant, determination of location is an important factor. Revenue have issued guidance which states that when crypto-assets exist on the cloud, the responsibility is on the taxpayer to prove where the gain accrued. This could be a difficult task for the taxpayer and Revenue advise that if the taxpayer is not in a position to determine where the location of the crypto-asset is, the gain may be subject to Irish CGT at 33% based on normal tax residence rules.

For non-domiciled individuals, this is not ideal. If the taxpayer cannot prove that the crypto-asset is situated outside Ireland, then by default, any gain arising from crypto-assets may fall within the charge to Irish CGT and the benefit of the remittance basis of taxation is lost.

The view of the UK Revenue (HMRC)

The view of the HMRC does not quite match that of the Irish Revenue. The HMRC are taking the position that the gain is taxable where the beneficial owner is resident regardless of where the crypto-asset is located. The Irish Revenue do factor in where the crypto-asset is located for non-domiciled individuals; however, demonstrating where the crypto-asset is located could prove difficult. 

There was a recent case in the English courts, Ion Science Limited, where the court considered an alternative position - that the location of the cryptocurrency was the place where the participant was domiciled, rather than looking at the status of the beneficial owner. The participant was the person(s) who had control over the crypto asset, as opposed to a beneficial owner having “ownership” of the asset.  For example, a participator who has control over a private key can be considered to be in control of the crypto-asset. A private key is required to implement a transaction relating to the crypto-asset - without the private key, there can be no transaction. In effect, in many situations, a participator is acting as a form of agent for the beneficial owner – carrying out transactions on the beneficial owner’s behalf using the private key to do so.

Our understanding is that the HMRC are standing by their conclusion and that the location of a gain accruing from crypto-assets is determined by the residence of the beneficial owner, and not the participator's status.

Although UK tax law is not enforceable in Ireland, the Irish Revenue generally tends to follow the UK Revenue’s principles. That is not the case at the moment in relation to this particular aspect of crypto-assets. But we will watch this space!

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below:

June 2022