Edited version of private advice

Authorisation Number: 1051537413985

Date of advice: 09 July 2019

Ruling

Subject: Cryptocurrency - personal use

Question

Are your Cryptocurrency used to purchase the online subscription "personal use assets"?

Answer

Yes.

Question

Are your other Cryptocurrency personal use assets?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Some years you stopped working due to an ongoing health issue.

You became interested in and researched in Cryptocurrency.

You started a hobby and estimated the equipment would cost about $X.

You wanted to purchase an annual subscription for a computer service (online subscription) at a cost of US $Y per year. You could pay for the annual subscription in Cryptocurrency.

A few years ago you purchased Cryptocurrency for a total of $Z - enough to purchase the hobby equipment and subscription service.

You purchased the subscription for a number of years.

You did not acquire the hobby equipment using Bitcoin.

In late 2017 Cryptocurrency was prominent in the media, and was discussed in general public.

Your relative said it would be a good idea to sell your Cryptocurrency.

You sold Cryptocurrency.

Relevant legislative provisions

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997 section 108-20

Income Tax Assessment Act 1997 section 108-20(2)(b)

Income Tax Assessment Act 1997 section 118-10

Reasons for decision

Question

Are your Cryptocurrency used to purchase the online subscription "personal use assets"?

Answer

Yes.

Question

Are your other Cryptocurrency personal use assets?

Answer

No.

Question

Will any capital gain made by you, on the disposal of the Cryptocurrency used to purchase the online subscription, be disregarded?

Answer

Yes.

Summary

Generally no your Cryptocurrency are not personal use assets in accordance with subsection 108-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

The exception is the Cryptocurrency you have used to purchase your annual computer subscription - proxy server.

Detailed reasoning

Cryptocurrency

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 (ITAA 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

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).

Australian Taxation Office Interpretive Decision 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.

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

Bitcoin are intangible assets; they are a digital representation of value and a bundle of rights (TD 2014/26).

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 if 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 became aware and interested in Cryptocurrency. Your intention was to purchase Cryptocurrency to purchase both items for your hobby and your online subscription.

Use and intention during the ownership period

Whilst the initial intent may not have been for a speculative investment it does not follow that, at some point speculative investment has not occurred.

During the period of ownership the Cryptocurrency increased in value. Cryptocurrency was openly discussed in the general public and you were fully aware of the increase in value during the period you held the asset. Your relative also advised you of the increase in value.

Length of time asset owned

The longer the period of time that a cryptocurrency is held, the less likely it is that it will be a personal use asset. You held the Cryptocurrency for a number of years.

Disposal

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

Cryptocurrencies are intangible assets; they are a digital representation of value and a bundle of rights. 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.

In your case each year you use some of your Cryptocurrency to purchase your online subscription, these we consider to be personal use assets.

You did not purchase hobby equipment directly with your Cryptocurrency.

You sold XX Cryptocurrency, near the height of its value.

If we consider it from the point in time where you received or purchased the Cryptocurrency, the most prolific function of Cryptocurrency was the rise in value.

Further, given the inherent nature of both Cryptocurrency that it is either used as a means of exchanging it for something of value, (to facilitate smart contracts) 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.

Your Cryptocurrency that you have sold are not personal use assets.

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 held Cryptocurrency (not used for your online subscription) will not be subject to the personal use exemption, and will be subject to capital gain tax.

Question

Will any capital gain made by you, on the disposal of the Bitcoin used to purchase the online subscription, be disregarded?

Section 118-10 of the Income Tax Assessment Act 1997 (TAA 1997) says that gains from personal use assets are disregarded if the first element of the cost base is less than $10,000.

Where your Cryptocurrency are not personal use assets the disposal of the Cryptocurrency cannot be disregard, but as you have held the assets for more than 12 months you can use the discount method when calculating your capital gain.

However, where you have purchased your online subscription with Cryptocurrency, these are personal use assets that have a cost base of less than $10,000; therefore subsection 108-20(1) and section 118-10 of the ITAA 1997 does apply and the gains may be disregarded.

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