In Revenue’s guidance that has been provided to date on cryptocurrencies, notably, they proclaim that cryptocurrencies are “best referred to as assets”, and that there are no specific rules that apply to cryptocurrencies.
In this blog post, we will go through what that means from a practical point of view for both business taxation and accounting.
Taxation (Corporation Tax, Income Tax)
The most common way crypto may be introduced into your business may be the decision to start accepting cryptocurrency as a payment method for your goods and services. There is no change to when revenue is recognised or how taxable profits are calculated even when a customer pays in crypto.
For example, ABC Limited currently has an inventory of €20,000; the markup of this inventory is 100%. On the 31st of Jan 2024, Customer XYZ Limited is interested in buying all of this inventory and paying with Bitcoin (priced at €40k at the time of the transaction).
For tax purposes, the profit made on this sale is like any other. We work out the euro value of the Bitcoin at the time of the sale and deduct our cost of sale to come to the gross profit, the same as any other sales the business makes.
After then taking into account all other overheads (and adjustments) this profit will be taxable at 12.5% as normal, when the business does its annual corporation tax return.
The only difference now is that instead of our cash balance increasing due to the sale, we now are holding cryptocurrency on our balance sheet.
Any subsequent realised gain made on the price appreciation of Bitcoin would be taxable as a capital gain (i.e if converted back to Euro at a profit) at a rate of 33%.
The only instances where crypto gains are not taxable under CGT for Irish businesses is where the actual trade of the business is to buy and sell cryptocurrencies (for example a cryptocurrency exchange).
Accounting
The ACCA has published guidance for the accounting of cryptocurrencies under the International Accounting Standards, which would also be applicable to many Irish businesses that report using the FRS102 accounting framework.
In their guidance, the ACCA advised that crypto assets would be considered intangible assets under IAS 38.
Initially, crypto assets are recognised on the balance sheet at their initial cost. Under IAS 38, there are two ways of subsequently measuring intangibles; the revaluation model, or the cost model.
If we continue our example from earlier in the post, where ABC Limited accepted cryptocurrency as a form of payment. When the payment of 1 Bitcoin is received (valued at €40k) this is then initially recognised on the balance sheet as an intangible asset.
ABC Limited decided it was most appropriate to use the revaluation model as there is an active market for Bitcoin and it is easy to get an up-to-date market price.
In the two months after receiving the Bitcoin the price increases to €60,000. To reflect this change in their accounts, ABC Limited revalued the Intangible assets and also reflected the gain in the equity section of the balance sheet, under Accumulated Other Comprehensive Income.
Due to the increase in the price the business owner decides to sell the Bitcoin on the 1st of April. The following accounting entries are posted to reflect this exchange of Bitcoin back to Euro.
Dr Cash €60,000
Cr Intangible Asset €60,000
Dr Accumulated Other Comprehensive Income €20,000
Cr Profit on sale Intangible Assets €20,000
Overall the business made a capital gain on the sale of the Intangible Asset (Bitcoin) and this is then reflected in the income statement as a profit on the sale of intangible assets.
When ABC Limited does its corporation tax return/CGT return, this capital gain will be taxable at 33%.
Other CGT-related notes
Capital losses made on crypto assets can be offset against company capital gains only. Unused losses in the current period may be rolled forward against future capital gains.
If the company make a trading loss it can offset this against capital gains on a value basis.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.
