Edited version of private advice

Authorisation Number: 1051545007826

Date of advice: 10 July 2019

Ruling

Subject: Cryptocurrency

Question 1:

Are the proceeds received from the sale of your cryptocurrency assessable as ordinary income?

Answer:

Yes

Question 2:

Does the sale of your cryptocurrency give rise to a CGT event?

Answer:

Yes

Question 3:

Will any capital gain made in relation to the sale of your cryptocurrency be disregarded under subsection 118-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

Question 4:

Can you choose either the "parcel selection" if the particular parcels can be identified or the "first in first out" approach in calculating the CGT cost base of your cryptocurrency disposed of?

Answer:

Yes

This ruling applies for the following periods:

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You developed an interest in cryptocurrency prior to XXX.

You mined cryptocurrency for a few months in XXXX.

You mined cryptocurrency for personal interest, curiosity and other reasons.

The cryptocurrency sat in your wallet until transferred or sold.

You are not in the business of mining or trading cryptocurrency.

The cryptocurrency you mined was held for long term investment purposes.

You kept your cryptocurrency to sell at opportune times based on market factors.

You have disposed of some of the cryptocurrency for personal purposes.

You disposed of some of the cryptocurrency and that resulted in a gain.

The proceeds were transferred into your bank account and used for personal purposes.

Relevant legislative provisions

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Division 108-5(1)

Income Tax Assessment Act 1997 Division 108-5(2)

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

Income Tax Assessment Act 1997 Division 118-10(3)

Reasons for decision

Question 1

Are the proceeds received from the sale of your cryptocurrency assessable as ordinary income?

Answer

No Your cryptocurrency are CGT assets and the proceeds received from the sale of your cryptocurrency are statutory income and are included in your assessable income.

Division 6 of the Income Tax Assessment Act 1997 (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 (section 6-10 of the ITAA 1997).

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.

Profit from an isolated transaction is 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 covered in 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? Which says,

22. Whether a gain on the disposal of bitcoin that are not personal use assets is included in a taxpayer's assessable income as a capital gain or as ordinary income will depend on all the facts and circumstances of the case. In the case of an isolated transaction that is not carried out as part of a business operation, the Commissioner considers that a gain will generally be ordinary income where the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and the transaction was entered into in carrying out a commercial transaction.

Statutory income

Statutory income means an amount which is not ordinary income but which is included in assessable income by statutory provision. A typical example is a net capital gain. Section 102-5 of the ITAA 1997 says that your assessable income includes your net capital gain (if any) for the income year.

Capital gains tax (CGT)

Under paragraph 108-5(1)(a) of the ITAA 1997, a 'CGT asset' is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

Note: Under paragraph 108-5(2)(a) of the ITAA 1997, a 'CGT asset' includes 'part of, or an interest in, an asset referred to in subsection (1).'

TD 2014/26 explains that bitcoin is a CGT asset. The principles in this determination can be used on all cryptocurrencies, and it is not limited to bitcoin.

In your case the income received from the sale of your cryptocurrency is not from rendering personal service, income from property or income from carrying on a business.

You do not receive the income from carrying out a business operation or commercial transaction.

Your cryptocurrency are CGT assets and the proceeds received from the sale of your cryptocurrency are statutory income and are included in your assessable income.

Question 2

Does the sale of your cryptocurrency give rise to a CGT event?

Answer

Yes

Any one of the events Division 104 of Income Tax Assessment Act 1997 (ITAA 1997) gives rise to a CGT event.

Division 104 divides CGT events into broad categories dealing with such things as asset disposals and terminations, the creation of rights and events arising under some more technical provisions of the tax law (e.g. consolidations and forex dealings). These categories are arranged alphabetically and the events are numbered, e.g. CGT event A1, CGT event K12.

Section 104-10 of the ITAA 1997 simply says that "CGT event A1 happens if you dispose of a CGT asset".

A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity.

The disposal of cryptocurrencies 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 cryptocurrencies are more than the cryptocurrencies' cost base. The capital proceeds from the disposal of the cryptocurrencies 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 cryptocurrencies will be included in the cost base of the cryptocurrencies.

The sale of your cryptocurrency gives rise to CGT event A1.

Question 3

Will any capital gain made in relation to the sale of your cryptocurrency be disregarded under subsection 118-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Your bitcoin are not personal use assets and therefore the disposal of the bitcoin cannot be disregarded. However, as you have held the assets for more than 12 months you can use the discount method when calculating your capital gain.

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.

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 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, 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 cryptocurrency.

Use and intention during the ownership period

During the period of ownership the cryptocurrency increased in value. You kept your cryptocurrency to sell at opportune times based on market factors.

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 Cryptocurrency to Australian Dollars or any fiat currency this strongly indicates the cryptocurrency you own was acquired, held and used for a purpose other than personal use or enjoyment.

Your cryptocurrency may be held for either investment or trading purposes, and profits on sale are earned in either case.

Given the inherent nature of your 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 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.

As stated previously, generally the time to determine personal use is on disposal of the asset. The cryptocurrency you have disposed of are not personal use assets. You have not used your cryptocurrency to directly purchase online products for your personal needs, such as clothing or music. You converted your cryptocurrency to Australian Dollars prior to using the funds. They are no subject to the personal use exemption and will be subject to capital gains tax.

Where you have not yet disposed of your cryptocurrency 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.

Your cryptocurrency are not personal use items

Question 4

Can you choose either the "parcel selection" if the particular parcels can be identified or the "first in first out" approach in calculating the CGT cost base of your cryptocurrency disposed of?

Answer

Yes

The Commissioner accepts the 'first-in first-out' approach as a reasonable basis of identification. For CGT purposes, the Commissioner will also accept the taxpayer's selection of the identity of assets disposed of if in fact they can be identified.

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