Edited version of your written advice

Authorisation Number: 1012958713070

Date of advice: 4 February 2016

Ruling

Subject: Deduction for payment to cloud Bitcoin mining service

Questions and Answers

1) Are you entitled to a deduction for the costs associated with using a cloud bitcoin mining service?

No

2) Will amounts you derive from selling bitcoin be assessable to you as ordinary income, either as income from a business or income from a profit-making undertaking or scheme that is a commercial transaction?

No

3) Will your selling of Bitcoin give rise to a capital gains tax event?

Yes

This ruling applies for the following period

Year ending 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts

You are using a cloud bitcoin mining service to acquire bitcoin.

You made a one off payment to enter into two contracts with the cloud mining service. The cost for both contracts was $.

You have only obtained bitcoins via the mining contract. You have never bought or sold any bitcoins.

A spreadsheet is the only record you maintain in relation to your bitcoins. You began acquiring bitcoin in 2016.

You do not have a detailed plan in relation to bitcoin.

You intend to spend the bitcoins on purchasing goods and services where possible. However in the circumstance there is a sudden rise in the price of bitcoin which would result in a large profit, you would give serious thought to selling all your bitcoins.

Your other investment activities include managing a portfolio invested in stocks, bonds, and ETF's that are all found on the ASX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 118-10

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for any loss or outgoing that is incurred in gaining or producing assessable income, to the extent that it is not of a private, capital or domestic nature.

It is not necessary that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income where:

• the interest is not incurred too soon, is not preliminary to the income earning activities and is not a prelude to those activities

• the interest is not private or domestic

• the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost

• the interest is incurred with one end in view, the gaining or producing of assessable income, and

• continuing efforts are undertaken in pursuit of that end.

The same principles can be applied to deductions for expenses incurred in using the services of a cloud bitcoin mining service.

An amount is not deductible under section 8-1 of the ITAA 1997 by reason of the inclusion in assessable income of the capital gain on disposal of a capital gains tax (CGT) asset.

Assessable income

Division 6 of the ITAA 1997 sets out what amounts are included in the taxpayer's assessable income. It provides that the following amounts are included:

• income according to ordinary concepts; that is, ordinary income (section 6-5 of the ITAA 1997), or

• an amount which is included by a specific provision about assessable income; that is, statutory income (including Capital Gains).

Ordinary income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held by case law to include three categories, namely, income from rendering personal service, income from property and income from carrying on a business.

The common law has identified a number of indicators that are relevant in determining whether a taxpayer's activities constitute the carrying on of a business. The question whether a taxpayer's activities should be characterised as a business is primarily a matter of general impression and degree.

The courts have held that the following indicators are relevant to the question of whether a taxpayer's activities amount to the carrying on of a business:

(a) whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

(b) whether the taxpayer has more than just an intention to engage in business;

(c) whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

(d) whether there is repetition and regularity of the activity;

(e) whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

(f) whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

(g) the size, scale and permanency of the activity; and

(h) whether the activity is better described as a hobby, a form of recreation or a sporting activity.

The Commissioner considers that a profit from an isolated transaction is considered ordinary income when there is a profit making intention and the transaction was entered into, and the profit was made, in carrying out a business operation or commercial transaction. This view is also stated TR 2014/26 Income Tax: is bitcoin a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997? in the context of determining whether a gain on the disposal of bitcoin is included in a taxpayer's assessable income as ordinary income or a capital gain.

You state that you intend to spend the bitcoins on purchasing goods and services where possible. However, in the circumstance there is a sudden rise in the price of bitcoin which would result in a large profit, you would give serious thought to selling all your bitcoins.

Your bitcoin transactions are not commercial transactions undertaken by you for the purpose of making a profit. Accordingly, the income you make from bitcoin transactions are not considered ordinary income for the purposes of section 6-5 of the ITAA 1997.

Capital gains tax (CGT)

Taxation Determination TD 2014/26 provides the ATO view that bitcoin is considered to be a CGT asset.

The disposal of bitcoin to a third party gives rise to CGT event A1. A taxpayer will make a capital gain from CGT event A1 if the capital proceeds from the disposal of the bitcoin are more than the bitcoin's cost base. The capital proceeds from the disposal of the bitcoin are, the money or the market value of any other property received (or entitled to be received) by the taxpayer in respect of the disposal. The money paid or the market value of any other property the taxpayer gave in respect of acquiring the bitcoin will be included in the cost base of the bitcoin.

Note: Under subsection 118-10(3), a capital gain made from a personal use asset is disregarded if the first element of the cost base is $10,000 or less. In addition, any capital loss made from a personal use asset is disregarded under subsection 108-20(1). See TD 2014/26 and TD 2014/25EC for further discussion on when Bitcoin is a personal use asset.

Currency translation rules

Subsection 960-50(6) of the ITAA 1997 provides that amounts relevant to transactions or events to which the CGT provisions apply are to be converted at the exchange rate prevailing at the time of the transaction or event.

Therefore, the cost base elements are converted at the time of the transaction and the proceeds from any sale of bitcoin are converted at the time of sale.

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