Digital and crypto-currencies
What is a digital or crypto-currency?
A digital or crypto-currency is a currency that is held and traded online and is not a physical currency. There are no notes or coins. They exist only in electronic form on computers. Bitcoin is one of the most widely-known digital or crypto-currencies.
Most crypto-currencies are created by a process known as “mining”, which involves people using powerful computers to solve complex mathematical problems to release the virtual currency. Crypto-currencies use a “blockchain”, a shared public record of transactions, to create and track transactions.
Usually only a limited amount of a certain crypto-currency can exist. For example, only 21 million Bitcoins can ever be created by miners.
How can you get crypto-currencies?
You can get crypto-currencies either through mining, buying one through a broker who deals with digital currency or being given one in exchange for something. Another common way to get crypto-currencies is through crypto-currency exchanges, which are businesses that allow customers to trade crypto-currencies for other assets, like traditional money or other digital currencies.
When you do get some crypto-currency, you keep it in a digital wallet, which is a piece of software that runs on your computer.
How do you use them?
You can use them to buy goods and services from people and organisations that accept crypto-currencies. You can also convert your crypto-currency into standard currency for everyday uses, using a crypto-currency exchange.
What protections do digital or crypto-currencies have?
Crypto-currencies are not centralised currencies, which means no one person or institution controls them. This means they are not regulated and don’t have any of the protections that regulated currencies and investments have.
The value of crypto-currencies is very changeable. Their value has increased and decreased very sharply at various times.
What is the risk of being scammed?
Be very careful of potential scams when it comes to crypto-currencies. You should be wary of “initial coin offerings” (ICOs), which is a way of crowdfunding the launch of new currencies or companies. Initial coin offerings are not regulated and could turn out to be scams, with the currency not launching at all or it could launch and the developers walk away from the project. The value of the currency falls and initial investments are wiped out.
Other types of scams associated with crypto-currencies could involve significant restrictions around cashing in your currency, lack of access to the currency you have bought and incentives for you to invest more money. Some can even act like pyramid schemes. These focus on people recruiting friends and family to invest in the crypto-currency. Promoting or participating in a pyramid scheme is illegal under Irish law, so you should be suspicious of any crypto-currency that encourages you to recruit people.
What are the fees and charges involved?
Most crypto-currencies have transaction charges for transferring and buying the currency which vary which are charged through crypto-currency exchanges.
You may also have to pay network fees to crypto-currency miners and fees for using a digital wallet to store the crypto-currency.
An investment in crypto-currency is looked upon by Revenue in the same way that an investment in any other currency, stock or share would be. Every gain you make from a crypto-currency must be declared to Revenue for Capital Gains Tax. Revenue will require you to declare details including a description of asset, sales proceeds and the cost of acquisition.