Edited version of your written advice

Authorisation Number: 1051345505136

Date of advice: 11 July 2018

Ruling

Subject: Cryptocurrency and contracts for difference

Question 1

Are you carrying on a business of trading contracts for difference with a “trading platform” during the 2016/2017 income year?

Answer

No

Question 2

Are you carrying on a business of trading contracts for difference with a “trading platform” during the 2017/2018 income year?

Answer

Yes

Question 3

Are the “trading platform” contracts for difference trading stock?

Answer

No

Question 4

Is the cryptocurrency denominated “trading platform” account trading stock?

Answer

No

Question 5

Can the CGT discount be applied to gains on withdrawals from the “trading platform” account?

Answer

No

Relevant facts and circumstances

A “trading platform” provides a Peer-to Peer digital trading platform for derivative trading.

You ‘deposited’ Cryptocurrency at various times with “cryptocurrency trading platform”, that is, you paid Cryptocurrency to the “cryptocurrency trading platform” and in return they opened an account denominated in Cryptocurrency which reflected the initial number of Cryptocurrency you transferred to them.

All contracts on the “trading platform” platform are valued in Cryptocurrency.

All profits and losses on CFD trading from the “cryptocurrency trading platform” are paid or charged directly to the Cryptocurrency denominated the “cryptocurrency trading platform” account.

All fees and charges, linked to the “trading platform” are paid from the Cryptocurrency denominated “cryptocurrency trading platform” account.

The “trading platform” does not accept deposits or make any payments in fiat currency.

You have been trading for a number of years.

You trade perpetual and future Contracts on the “trading platform”.

In the first financial year you had minimal activity.

You started earnestly trading in the second financial year –trading a number of times a day and invested significant capital

You conduct extensive research and analysis prior to trading.

You follow your trades extensively, and demonstrate a methodical approach.

You had a Cryptocurrency balance in your “trading platform” account.

You have a turnover of over $XXX.

You do not have full records of all of your transactions.

You do not have any other employment and consider trading CFD’s your full time employment

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 15-5

Income Tax Assessment Act 1997 Section 25-40

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 118-25

Income Tax Assessment Act 1997 Section 70-10

Reasons for decision

Question 1 and 2: Are you carrying on a business of trading contracts for difference with a “trading platform”?

Contracts for differences (CFD) are a form of cash-settled derivative in that they allow investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying. Financial CFD’s include those relating to share prices, share price indices, financial product prices, commodity prices, interest rates and currencies.

Taxation Ruling TR 2005/15 (Income tax: tax consequences of financial contracts for differences) (TR 2005/15) provide us with the Commissioner’s view of tax treatment of those who enter into CFD contracts.

At paragraphs 11 to 15 it says:

‘11. A gain from a financial contract for differences will be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where the transaction is entered into as an ordinary incident of carrying on a business, or where the profit was obtained in a business operation or commercial transaction for the purpose of profit making.

12. A loss from a financial contract for differences will be an allowable deduction under section 8-1 of the ITAA 1997 where the transaction is entered into as an ordinary incident of carrying on a business or in a business operation or commercial transaction for the purpose of profit making.

13. A gain from a financial contract for differences will be assessable income under section 15-15 of the ITAA 1997 where a taxpayer enters into a financial contract for differences in carrying on or carrying out a profit-making undertaking or scheme, and the gain from it is not assessable under section 6-5 of the ITAA 1997.

14. A loss from a financial contract for differences where the gain would have been assessable under section 15-15 of the ITAA 1997 is an allowable deduction pursuant to section 25-40 of the ITAA 1997.

15. A gain or loss from a financial contract for differences entered into for the purpose of recreation by gambling will not be assessable income under section 6-5 or section 15-15 of the ITAA 1997 or deductible under section 8-1 or section 25-40 of the ITAA 1997. A capital gain or capital loss from a financial contract for differences entered into for the purpose of recreation by gambling will be disregarded under paragraph 118-37(1)(c) of the ITAA 1997.’

Where CFD transactions are part of the carrying on of a business, the gains from the CFD transactions will be accounted for under section 6-5 of the ITAA 1997 and the losses under section 8-1 of the ITAA 1997.

If the CFD transactions are not carried on as a business, it may still be a commercial transaction for the purpose of profit making and the gains or loss would also be accounted for under sections 6-5 and 8-1 of the ITAA 1997.

In either case, the gains and losses from CFD transactions are accounted for on revenue account.

In your case, your “trading platform” products have the characteristics of a CFD but they are settled in Cryptocurrency. They allow you to take risks on movements in the price of cryptocurrency (the 'underlying') without ownership of the underlying.

Just because a taxpayer's activities amount to the carrying on of a business in one income year, it does not automatically follow that they were carrying on a business in previous years or following years. The extent of the activity dictates whether the taxpayer continues to carrying on a business. If the business activity falls below what is required for that activity to be commercially viable, the activity may no longer constitute the carrying on of a business.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides a guide to the indicators that the courts have held to be relevant as to whether or not a person is carrying on a business. It should be noted that the principles in this ruling apply equally to all businesses. The indicators are:

• Whether the activity has a significant commercial purpose or character,

• Whether the taxpayer has more than an intention to engage in business,

• Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity,

• Whether there is repetition and regularity of the activity,

• Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business,

• Whether the activity is planned, organised and carried out in a business-like manner,

• The size, scale and permanency of the activity,

• Whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Whether or not a person is carrying on a business is a question of fact, not a question of law. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. There is no one factor that is decisive of whether a particular activity constitutes a business.

Were you carrying on a business in the first financial year?

In considering the indicators from TR 97/11 to determine whether you were carrying on a business, it is acknowledged that the activity undertaken by you had the purpose of profit.

The amount of capital you have invested is also considered to be a significant amount.

However, in your own words you had “minimal activity, just a few trades here and there”.

Thus, after consideration of all of the relevant indicators and the circumstances of your case, it is concluded that your CFD transactions were not part of carrying on a business.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income? provides the Commissioner’s view on whether profits on isolated transactions are income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936), now section 6-5 of the ITAA 1997.

The definition of 'isolated transactions' in paragraph 1 of TR 92/3 includes 'transactions entered into by non-business taxpayers'.

Paragraph 16 of TR 92/3 states that:

‘If a taxpayer who is not carrying on a business makes a profit, that profit is income if:

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

(b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.’

For example, paragraph 19 of TR 2005/15 confirms the principles are applicable to financial contracts for differences where the profit or loss was made in either a business operation or a commercial transaction for the purpose of profit making.

TR 2005/15 states at paragraph 23 that:

…speculation on a financial risk can be characterised as being commercial, in that it increases the efficiency of the financial markets by adding to the depth and liquidity of the markets.

CFD transactions are seen as a commercial undertaking this combined with the fact that you had a profit making purpose means that your gains from the CFD transactions would be assessable under section 6-5 of the ITAA 1997 as a profit making undertaking.

Consequently it also means that your losses from the CFD transactions are deductible under section 8-1 of the ITAA 1997. You may offset these deductions from your transactions against your other income.

Were you carrying on a business in the second financial year?

In your case, in the second year, the factors that show you were in business are:

• You have a separate cryptocurrency account with the “trading platform” for your CFD transaction indeed it is a requirement;

• You opened and closed CFD regularly, you made a number of transactions a day;

• You are methodical in your approach to transactions;

• You conduct extensive research and analysis;

• You have a substantial amount of money invested in your activities, and

• Your turnover was over $X for the year.

It is clear you are carrying on a business for the second year.

Note: TR 2005/15 provides examples of how to calculate the profits and losses on CFD trades.

Question 3: Are the “trading platform” contracts for difference (CFD) trading stock.

Trading stock is defined in Section 70-10 ITAA 1997 to include “anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business and livestock”.

Certain assets are excluded from being treated as trading stock.

An investor in CFDs does not dispose of the CFDs by way of sale, but rather by entering into an equal and offsetting CFD transaction with the CFD provider (such as A “cryptocurrency trading platform” ).

CFDs cannot be sold or exchanged in the ordinary course of business, they are merely a form of derivative that allows investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying.

Whilst not covered in TR 2005/15, this outcome is consistent with the Commissioner’s view in relation to futures transactions contained in IT 2228 Income tax: Futures Transactions and exchange traded options (refer ATOID 2004/526 Income Tax Options trading) settled in the same manner.

Therefore the “trading platform” contracts for difference are not trading stock.

Question 4: Is the Cryptocurrency denominated “trading platform” account trading stock?

Second income year

The activities included in a business are a conclusion of fact rather than law. Jessel M.R. said in Ericksen v. Last (1881) 8 Q.B. 414 at P 416 said “There are a multitude of things which together make up the carrying on of trade.”

The trading rules of “cryptocurrency trading platform” are such that to transact in any of their products:

• You must open a Cryptocurrency denominated account with the “cryptocurrency trading platform” to use to acquire and settle contracts.

• You must pay all the “trading platform” fees and charges in Cryptocurrency.

• All contracts on the “trading platform” are bought and sold in Cryptocurrency.

• All profits and losses from trading CFDs through the “trading platform” are settled in Cryptocurrency.

• The “trading platform” does not handle fiat currency.

You are restricted in the transactions you can use you the “trading platform” Cryptocurrency account for – it can only be used on the “trading platform”. Your Cryptocurrency account cannot be converted to fiat currency or cryptocurrency, including Cryptocurrency, on the “trading platform”.

Once the available credit is withdrawn from the “trading platform” account and sent to a wallet held by you or possibly another service you can deal with the Cryptocurrency as you wish.

You must purchase Cryptocurrency to deposit in the “trading platform” account prior to transacting CFDs with A “cryptocurrency trading platform”.

As you are in the business of transacting contracts for difference with A “trading platform”, and the “trading platform” account denominated in Cryptocurrency is an integral part of the transaction, the Cryptocurrency denominated account you have with the “trading platform” is part of the business.

The Cryptocurrency denominated “trading platform” account is not held for sale or exchange in the ordinary course of business. The Cryptocurrency are transferred to the “trading platform” and create a right to the balance of the “trading platform” account which is merely to allow for the trade in the “trading platform” contracts.

The account is intrinsic to trading on the “trading platform” but it is not trading stock.

This means that, like the CFDs being transacted, the “trading platform” account is on revenue and any gains or losses realised when the account is debited or credited are assessable or deductible under sections 6-5 or 8-1 of ITAA 1997 respectively.

First income year

While not part of a business in the first year, the account was also an essential and intrinsic part of the profit making undertaking and as per the period you were in business changes in the account are on revenue and any gains or losses realised when the account is debited or credited are assessable or deductible under sections 6-5 or 8-1 of ITAA 1997 respectively.

Question 5: Can the CGT discount be applied to withdrawals from the “trading platform” account?

As discussed above the “trading platform” account is on revenue account as it is an intrinsic part of the business or profit making undertaking. The anti-overlay provisions in section 118-20 ITAA 1997 would apply to reduce any capital gains.

Any gain or losses on credits or debits to the account by the “cryptocurrency trading platform” would result in an assessable or deductible amount as explained above.

Therefore there would be no discount capital gains to which the discount could be applied.

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