What taxes apply to my cryptocurrency gains (and losses)?

I am a middle-income worker in the public sector and as such a PAYE worker. I also do some work (tutor) as a sole trader where I add the additional income with Revenue.

At the start of the year, I started trading the stock exchange and cryptocurrencies. I started off with small amounts but, unfortunately, by the start of summer I had a substantial investment. Lo and behold, it was left in too long and I lost about 60 per cent of my initial investment (let that be a warning to amateur investors).

My query is that I understood that I would be paying capital gains tax on profits over a certain amount. But, as I work as a sole trader and make a small amount of money in that, is it possible to somehow write off these losses against this?

Mr M.K., email

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Cryptocurrencies are all the rage these days and the spectacular gains made at various stages have seen them become a tempting option for private investors. The emergence of low- or zero-cost trading on platforms such as Robinhood has only exacerbated this trend.

But volatility has been a watchword for this sector, making it spectacularly ill-suited to novice retail investors or those without the discipline to sit out short-term changes in price direction.

There is also the issue of the spectacular lack of regulation in the crypto market at present. Only last week, the British regulator – the Financial Conduct Authority – one of the most powerful worldwide, had to concede that properly regulating the cryptocurrency exchange Binance was beyond it despite the "significant risk" posed by its products, that allow consumers to take supercharged bets.

The problem? The British operation of Binance, which has no fixed headquarters, simply stonewalled the FCA, refusing to answer some basic queries.

Revenue has decided to date that no new rules are required to address crypto asset trade. Instead, they are treated in line with other transactions

This is the wild west of investment. Money will be made by many, for sure, but others will suffer potentially crippling losses.

This volatility is well illustrated in your case. I don’t know which or how many of the myriad different cryptocurrencies you invested in but the sector was in a trading slump at the end of June when you first wrote to me. It has since recovered much of its mojo – so much so that you are likely to be back on level terms if not ahead on your crypto trading so far.

Tax options

But, winning or losing, what’s the position with tax? That depends on the nature of your interaction with crypto. Revenue has decided to date that no new rules are required to address crypto asset trade. Instead, they are treated in line with other transactions.

What that means is that if you were dealing in crypto as part of your trading operation – for instance by charging or accepting payment for your work as a tutor in crypto assets – they would be taxed as income or, if you were a limited company, under corporation tax.

When it comes to investment, however, it’s almost certain that it will be treated under the capital gains tax regime. That being so, any losses you actually realised on your crypto investment by cashing out your position could be offset against gains made on the sale of shares or other assets this year. If enough gains were not made this year to offset such losses, they could be offset against gains in future years.

If you're investing in a volatile market, pay attention and don't overextend yourself

On the flip side, any gains you make on the sale of crypto assets in any year will be taxed at 33 per cent, assuming the gains are in excess of the €1,270 annual CGT exemption.

Going back to that word “almost” above, your pattern of trading could alter that situation. If you were acting as a day trader or close to, it could be argued that the transactions were part of your trading income.

That would bring it back to the income tax regime, with losses offset against other income. Of course, so would gains and these could be taxed at 40 per cent plus universal social charge and possibly PRSI.

However, in the limited circumstances outlined, my sense is that you will fall under the capital gains tax regime in line with your initial understanding.

Two little words of advice: from your letter, you seem to have found yourself with a “substantial investment” in crypto almost by accident before that price plunge left you out of pocket on paper at least.

First, when you do make gains on volatile investments like this, it is a good idea to at least protect your initial investment by taking that money off the table and continue to “play the market” with your gains.

And, second, if you’re investing in a volatile market, pay attention and don’t overextend yourself. Crypto is today’s bubble asset: it may settle down but it may also crash and you don’t want to be left as the last one standing.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into