Edited version of private advice

Authorisation Number: 1052152626256

Date of advice: 9 August 2023

Ruling

Subject: Cryptocurrency - trader or investor

Question

Is the profit from your cryptocurrency activities assessable under 6-5 of the Income Tax Assessment 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Period Ended 30 June 2022

The scheme commenced on:

13 July 2021

Relevant facts and circumstances

You commenced trading in cryptocurrency prior to the relevant financial year and moved into day trading including derivative/margin trading in the relevant financial year.

You provided dates for when you commenced futures trading and the names of the platforms they were traded on.

Your strategy when you commenced trading prior to the relevant financial year was to buy and hold.

You traded Contracts for Differences (CFD's) in the relevant financial year.

You provided specifics on how much you invested, and how much you had budgeted for investment to ensure you did not exceed this.

You advised how many trades were conducted, how they were conducted, and your total loss or gain for the relevant financial year.

You provided an end of year report from a cryptocurrency tax reporting software for the relevant financial year displaying all trades, platforms used, cryptocurrency assets traded and the associated costs.

Your reports showed an average number of trading days per month, and that majority of your trading was being conducted in specific months.

You provided details on your cryptocurrency trading strategy.

You provided details on what system you had in place to preserve your capital.

You spent a percentage of your time researching and looking at the market and the remaining percentage making sure the entries were correct and setup with the necessary stop losses while maintaining action on charts.

You commenced trading with the intent of making a profit.

Your transactions were logged in a signal provider, and some kept on spreadsheets. Futures transactions were all kept on exchanges where fees were payable.

You advised you have a business plan; however this was not provided. You did however advise that your business plan included how you were going to start improving your skill in cryptocurrency with the plan to move into cryptocurrency full time by the end of the relevant

In the relevant financial year, you completed online trainings offered by other traders and paid a subscription to join an Australian Cryptocurrency business.

You conducted your cryptocurrency activity in an allocated office space which included a computer and monitor. Occasionally, you would conduct the trades outside of your office space.

Outside of your employment you spent on average an additional specified number of hours per week on your cryptocurrency activity. This compromised of a specified number of hours per week researching cryptocurrency and a specified number of hours placing the trades and charting the trades.

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 8-1

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 25-40

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Determining whether income from your cryptocurrency trading activity is assessable income under section 6-5 of the ITAA is the same as determining whether your activities are considered to be carrying on a business for tax purposes.

Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? lists the factors that are considered important in determining if a business activity is being carried on are:

•                     whether the activity has a significant commercial purpose or character

•                     whether the taxpayer has more than just 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 regularity and repetition of the activity

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

•                     whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

•                     the size, scale and permanency of the activity, and

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

The above factors must be considered in light of one another, with no single factor being determinative of whether the taxpayer is engaged in carrying on a business. Even where any one factor is not present, this will not necessarily mean that a business is not carried on: Evans v. Federal Commissioner of Taxation (1989) 20 ATR 922.

The bar for cryptocurrency and CFD trading is quite high, with the most significant factors usually the volume of trading, repetition and regularity and conducting operations in a business-like manner

Based on the factors of your situation, we have considered the following indicators:

Whether the activity has a significant commercial purpose or character

This indicator requires that you be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. You need to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

The low level of transactions along with the repetition and regularity that you have completed during the financial year indicates that your cryptocurrency activity lacks a commercial purpose.

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

You had an intention to engage in your activities and have completed cryptocurrency purchases and sales.

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

The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Where a business trading in cryptocurrency exists, there is usually a business plan on how the activities will be conducted.

Based on the information provided you had a loss and did not make a profit from your trading activity in the relevant financial year. You did, however, attempt to implement basic trading strategies, supplied a capital investment to initiate trading, and continually educated yourself in an attempt to increase profit. This displays a purpose as well as prospect of generating profit from the trading activity.

Whether there is repetition and regularity of the activity

In the case of crypto currency trading, repetition and regularity are important indicators on whether a business is being carried on, with the size and scale of the activity being supporting factors.

Your trading activity was conducted over an average number of days per month, with no regularity or repetition to the days traded and quantity of trades completed, along with the majority of your trades being conducted over a 2-month period in specific months. You completed a specified number of trades over the relevant financial year.

This is not considered to be a high level of crypto currency transactions and is not in keeping with the sales that would be expected of a person who was in business as a cryptocurrency trader.

The size, scale, and permanency of the activity

Cryptocurrency trading that is being conducted on a small scale is more likely to be considered investing, however a trader could trade small amounts with high regularity, while a share investor could have several million dollars at stake.

Although you had reasonably sized buy transactions, the number of cryptocurrency trading transactions completed for the financial year has limited the size and scale of the trading activity.

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

Activities are more likely to be carrying on a business where they are carried on in a similar manner to other businesses in the industry.

The following information indicates that you are not carrying out your cryptocurrency trading activities in a similar manner to others in this industry:

•                     You do not have a relevant licence, qualifications, or a registered business name

•                     Though a business is not necessarily infinite, no further funds were borrowed or attempted to be sourced to maximise any potential gains / returns and to continue the trading activity

•                     Your trade choices were limited and did not have the variety or diversity that would normally be expected of commercial trading operation

Whether the activity is planned, organised, and carried out in a businesslike manner

Activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised manner. This usually involves some form of forward planning such as contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining, and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records.

You completed research on the market and expected trends, however, your trading strategy and strategy to preserve capital did not display the sophistication that may be expected of a cryptocurrency trading business. You were also engaged in another full-time occupation during the relevant financial year.

Whether the activity would be better described as a hobby, recreational or sporting activity

You commenced the cryptocurrency trading activity with the intention to make a profit based on research conducted by yourself in relation to the cryptocurrency. This indicates that the transactions were speculative. The majority of the losses were from speculative transactions and speculative losses are accounted for on capital account.

Your share transactions would not be better described as a hobby, recreation, or a sporting activity. They are considered investment income

Tax Treatment Contracts for Differences (CFD's)

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference outlines the taxation treatment of CFD's. A CFD is a form of cash settled derivative that allows investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying.

Paragraph 16 of TR 2005/15 says where this type of trading is part of the carrying on of a business, the gains and losses from the transactions will be assessed under sections 6-5 of the ITAA 1997.

Otherwise, paragraphs 34 and 35 of TR 2005/15 states the trading activities will be regarded as the carrying out of a profit-making undertaking and a net gain or a net loss from trading will be accounted for under either sections 15-15 or 25-40 of the ITAA 1997.

In any case, the gains and losses resulting from a CFD transaction will be of an income nature.

Conclusion

After weighing the relevant business indicators against the information and documentation provided, it is the Commissioner's view that the overall impression is that you were not carrying on a business of trading in cryptocurrency or CFD's during the relevant financial year.

As such, your cryptocurrency assets are considered capital gains tax (CGT) assets. The losses sustained on the disposal of your cryptocurrency assets would be a capital loss, under section 102-10 of the ITAA 1997. The capital losses and can be offset against capital gains made that year.

Where you have traded in CFD's, any gains will be assessable under section 15-15 of the ITAA 1997, and any losses deductible under section 25-40 of the ITAA 1997.

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