Edited version of private advice

Authorisation Number: 1051532082955

Date of advice: 5 July 2019

Ruling

Subject: Cryptocurrency

Question 1

Is the acquisition date of the NewCoins issued to you via a "chain split" for the purposes of determining the ability to discount the Capital Gain on the sale of the NewCoin the date of purchase of the original coin?

Answer

No

Question 2

Is the cost base for the NewCoins sourced through "chain splits" $0 (Zero Dollar)?

Answer

Yes

Question 3

Are the NewCoins considered a personal use asset for CGT purposes?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You invested in Cryptocurrency.

The majority of the Cryptocurrency you hold were acquired more than 12 months before the beginning of the XXXX financial year.

You hold all Cryptocurrency as an investment on capital account.

At numerous times throughout the years you received other types of Coins (NewCoin) through "chain splits" which have been issued to you in proportion to your Cryptocurrency holding.

You would not be receiving these NewCoins if you were not a holder of your Cryptocurrency.

You sold the NewCoins as soon as practicable following receipt and received Cryptocurrency as consideration.

You believe the acquisition date for the NewCoins should reflect the acquisition date for the underlying Cryptocurrency they relate to.

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 104-155

Income Tax Assessment Act 1997 Subsection 109-5(1)

Income Tax Assessment Act 1997 Subsection 109-5(2)

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Division 130

Income Tax Assessment Act 1997 Section 130-20

Income Tax Assessment Act 1997 Subsection 130-20(1)

Income Tax Assessment Act 1997 Paragraph 130-20(1)(b)

Income Tax Assessment Act 1997 Subsection 130-20(2)

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Questions 1 and 2

Summary

If you hold cryptocurrency as an investment, and receive a new cryptocurrency - NewCoin, as a result of a "chain split" (such as Bitcoin Cash being received by Bitcoin holders), you do not derive ordinary income or make a capital gain at that time as a result of receiving the NewCoin.

The date you acquire the NewCoin is the date you become its owner.

If you hold the new cryptocurrency as an investment, you will make a capital gain when you dispose of it. For the purposes of working out your capital gain, the cost base of a NewCoin received as a result of a "chain split" is zero. If you hold the Newcoin as an investment for 12 months or more, you may be entitled to the Capital Gains Tax discount.

Example

Alex held 10 Bitcoin on 1 August 2017 as an investment, when Bitcoin Cash split from Bitcoin. Immediately after the chain split, Alex held 10 Bitcoin and 10 Bitcoin Cash. Alex does not derive ordinary income or make a capital gain as a result of the receipt.

On 25 September 2018, Alex sold the 10 Bitcoin Cash for $4,000. The cost base of the Bitcoin Cash was zero, Alex makes a capital gain of $4,000 in the 2017-18 income year from the sale of the Bitcoin Cash. Alex is entitled to a 50% CGT Discount as he has owned the Bitcoin Cash for over 12 months.

Detailed reasoning

TD 2014/25 - Income tax: Is bitcoin a 'foreign currency' for the purposes of Division 775 of the Income Tax Assessment Act 1997? Says that the Oxford Dictionary of English (3rd Ed) defines Bitcoin as:

a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank: bitcoin has become a hot commodity among speculators / If you want to buy something using bitcoin you need to make sure the seller accepts the cryptocurrency.

TD 2014/25, paragraph 8 says

"It (Bitcoin) is described by commentators as 'a virtual currency that essentially operates as online cash' and as a 'crypto-currency, designed to reinvent the way that money works'. Bitcoin operates as a decentralized peer-to-peer payments network whose implementation relies on the use of public-key cryptography to validate transactions involving existing bitcoin and in doing so generates new bitcoin. The Bitcoin system is decentralized in that it is not under the control of a central authority. Transactions on the Bitcoin network are denominated in bitcoin. The value of bitcoin is 'not derived from gold or government fiat, but from the value that people assign it'.

Paragraph 8 (b) of TD 2014/26 says that Bitcoin is a bundle of rights ascribed to a person with access to the bitcoin under the Bitcoin software and by the community of Bitcoin users.

TD 2014/26 applies to bitcoin and cryptocurrencies like bitcoin.

"Chain Split"

A "chain split" involves a change in the software (consensus rules) that is significant enough to create two incompatible block chains.

As a general proposition, if one of the post "chain split" has the same core consensus rules as the original chain, then it is a continuation of the original chain. As the original cryptocurrency has not changed the cost base of it is unaffected.

Where after a "chain split", the original block chain continues (and thus the original cryptocurrency continues), and a new block chain is formed, a NewCoin is created.

The general rule is that a taxpayer acquires a CGT asset when the taxpayer becomes its owner (subsection 109-5(1) of the ITAA 1997). Specific rules in subsection 109-5(2) of the ITAA 1997 sets out the time that a CGT asset is acquired as a result of a CGT event happening.

Broadly, the time of acquisition mirrors the time when an event happened or the taxpayer becomes the owner.

In the case of a "chain split", you become the owner when you take receipt of the NewCoin.

Where the taxpayer does not receive the payment to give up any part of the original property, Section 110-25 of the ITAA 1997 holds that first element of the asset's cost base will be zero.

In this case your ownership of the original cryptocurrency remains untouched.

As you did not pay any money or give any property to acquire the NewCoin, the first element of the asset's cost base will be zero.

If you hold cryptocurrency as an investment, and receive a NewCoin as a result of a "chain split" (such as Bitcoin Cash being received by Bitcoin holders), you do not derive ordinary income or make a capital gain at that time as a result of receiving the NewCoin.

Question 3

Summary

Your NewCoins are not personal use assets in accordance with subsection 108-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

Based on the facts provided and circumstances as described the Commissioner is of the opinion that neither your Cryptocurrency or NewCoin are personal use assets and will be subject to capital gain tax.

Detailed reasoning

Cryptocurrency

Generally cryptocurrency is only capable of being acquired, held and transacted with. Both the period of holding and the nature of the subsequent transaction will be relevant to whether your cryptocurrency is a personal use asset. The relevant time for determining whether or not an intangible asset is a personal use asset is at the time of its disposal.

Personal use assets

Section 108-20 of the Income Tax Assessment Act 1997 (TAA 1997) says that personal use assets are Capital Gains Tax (CGT) assets, other than collectables, that are used or kept mainly for the personal use or enjoyment of you or your associates. Subsection 108-20(2)(b) of the ITAA 1997 says that a personal use asset can include an option or right to purchase a CGT asset of that kind -meaning a right to purchase a personal use asset.

When the CGT provisions of the Income Tax Assessment Act 1936 (ITAA 1936) were enacted, the following kinds of property were given as being examples of personal use assets - clothing, white goods, furniture, sporting equipment, cameras and boats.

Mainly used or kept

The Australian Taxation Office Interpretive decision ATO ID 2002/795 - Are unused marble floor tiles 'personal use assets' as defined in subsection 108-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? states it does not matter if the assets are actually used for the purpose for which they had acquired, it is the intent of the purchase and the purpose for which an asset is mainly kept that is key to if an asset is a "personal use" asset.

The definition of mainly is predominantly, chiefly, principally, or for the most part (ATO ID 2002/795).

ATO ID 2011/37- Income Tax: CGT small business concessions: maximum net asset value test - disregarded assets - asset being used solely for personal use and enjoyment explains that the entire ownership period is taken into account and if regard was had only to an asset's use at a single point in time, the result would not necessarily reflect the true nature of the use of the asset.

Personal use or Enjoyment

An asset has to provide an individual with a source of pleasure or relate directly to that individual to be a "personal use" asset.

An asset cannot be a personal use asset if it is mainly acquired, kept or used as an investment, as part of a business or for a profit-making purpose. The two categories are mutually exclusive.

Where an individual keeps those bitcoin for a number of years with the intention of selling them at opportune times based on favourable rates of exchange this is not personal use.

TD 2014/26 Income tax: is bitcoin a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997? confirms that Bitcoin that is kept or used mainly to make purchases of items for personal use or consumption ordinarily will be kept or used mainly for personal use. However, if the bitcoin were instead purchased to facilitate the purchase of income producing income producing investments, they would not be personal use assets.

ITAA 1997 does not provide a definition of investment, however, generally it's the allocation of a resource (money) in the expectation of some benefit in the future.

In Favaro's case (Favaro v FC of T 96 ATC 4975), Italian currency, which was converted to Australian currency and invested, was held not to be a personal use asset (under section 160B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)). In this case a significant portion of the currency was seen to be invested. It was held that the purpose of holding the currency was that it was to be exchanged for Australian currency at a favourable rate and therefore was not personal use.

Intangible Assets

The definition of personal use includes the right or option of the Taxpayer to acquire a CGT asset that would be a personal use asset.

In most cases, an intangible asset would not be considered to be a personal use asset. An exception to this may be where an intangible asset is used to directly acquire an asset held mainly for personal use and enjoyment. That is, the intangible asset can take on the character of another asset.

For example, where you are provided an option to purchase a boat for personal use; the option would itself be an intangible personal use asset. TD 2014/26 states where an individual taxpayer purchased bitcoin from a Bitcoin exchange and uses the bitcoin to make online purchases for their personal needs, for example clothing or music, that would be considered to be a personal use asset.

Investment

TD 2014/26 goes on to say that bitcoin that is kept or used mainly for the purpose of profit-making or investment, or to facilitate purchases or sales in the course of carrying on business is not used or kept mainly for personal use. Further, the inherent nature of bitcoin means that it is generally either used as a means of exchanging it for something of value, or it is kept as a speculative investment.

Disposal

We take into account the nature of the property acquired when the bitcoin is disposed of (for example, whether the bitcoin is used to purchase an investment) when considering if bitcoin is a personal use asset (TD 2014/26).

If you have to exchange a cryptocurrency you own to Australian dollars (or to a different cryptocurrency) to purchase or acquire the items for personal use or consumption, then this strongly indicates the cryptocurrency you own was acquired, held and used for a purpose other than personal use or enjoyment.

Therefore when we consider personal use of an asset we consider the following aspects:-

·         the initial intention,

·         the use and intention during the period owned,

·         the length of time the asset was owned, and

·         the subsequent disposal.

Initial intention

In your case you invested in your Cryptocurrency. As part of the investment you received NewCoin.

Use and intention during the ownership period

During the period of ownership your Cryptocurrency increased in value. You made a decision to convert the NewCoin as soon as practical to your Cryptocurrency which was your main investment interest.

Disposal

Generally the relevant time for determining whether or not an asset is a personal use asset is at the time of its disposal.

Where you exchange your NewCoin to a different cryptocurrency this strongly indicates the cryptocurrency you own was acquired, held and used for a purpose other than personal use or enjoyment.

You converted NewCoin to Cryptocurrency to increase your holdings in your Cryptocurrency investment.

Given the inherent nature of Cryptocurrency is that it is either used as a means of exchanging it for something of value, or it is kept as an investment; the timing and quantity purchased, and, the fact that the you have held on to them demonstrates that you have not used them mainly for personal use.

Further, NewCoin and Cryptocurrency are intangible assets; they are a digital representation of value and a bundle of rights (TD 2014/26). Generally intangible assets are not considered to be personal use assets. An exception to this may be where an intangible asset is used to directly acquire an asset held mainly for personal use and enjoyment.

You have not disposed of your Cryptocurrency or NewCoin to directly purchase online products for your personal needs, such as clothing or music.

As stated previously, generally the time to determine personal use is on disposal of the asset. However, based on the facts provided and circumstances as described we are of the opinion that on disposal your Cryptocurrency will not be subject to the personal use exemption, and will be subject to capital gain tax.

The Cryptocurrency and NewCoin are not personal use assets.

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