Edited version of private advice

Authorisation Number: 1052229907304

Date of advice: 7 March 2024

Ruling

Subject: CGT and cryptocurrency

Question 1

Does your commitment of A coins to enable the stake function in the smart contract constitute a disposal event under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Does your receipt of A coins when the stake ends, constitute the acquisition of a new CGT asset at zero cost base under section 110-25 of the ITAA 1997?

Answer

No

Question 3

Are the additional amounts of A coins received at the end of the stake assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes for the income years in question.

You have participated in the A cryptocurrency arrangement since XXXX.

The disclaimer on the cryptocurrency website provides a limitation of liability that states that unless otherwise required by law, in no event shall the owners of, or contributors to, the software be liable for any damages of any kind, including, but not limited to, loss of use, loss of profits, or loss of data arising out of or in any way connected with the use of the cryptocurrency software in no way are the owners of, or contributors to, the cryptocurrency software responsible for the actions, decisions, or other behaviour taken or not taken by you in reliance upon the cryptocurrency software.

The A cryptocurrency arrangement operates as a set of smart contracts on the Ethereum network.

Users stake their A coins by committing them for a set period of time and receive newly minted A coins at the end of the time period.

The smart contract defines how the cryptocurrency arrangement can be interacted with, including the operation of the staking functionality, burning the staked coins and sending newly minted A coin when the stake has ended.

To trigger the staking function, the user must send the committed A coins to the smart contract. The smart contract then burns the A coins and issues the user with B-shares. The process of burning means sending the committed A coins to a burn address which is not owned by anyone and the coins are not controlled by anyone. This takes the coins permanently out of circulation.

Once the stake period has elapsed, the stake is considered to have matured. At this point the user has X days to take action, otherwise they incur penalties. There are two alternative actions that a user can take. They can end a stake using the End Stake (ES) function on the smart contract where the smart contract calculates the payouts, mints new A coins, and credits them to the user. The second is a function which gives users an option to safely end a stake that has matured and avoid incurring penalties but does not mint new A coins for the user. The user can call ES at a later date to finalise the stake and receive new A coins.

If you end the stake using the ES function, you will receive an amount of new A coins equal to the amount originally committed, plus an additional amount of new A coins proportional to the number of B-Shares held, called payouts.

If the user ends their stake before it has matured by calling the Emergency End Stake function on the smart contract, the user will incur a penalty. The penalty is based on how much time was remaining before the stake matured with a maximum penalty of X%.

The smart contract calculates payouts based on a payout pool of B-shares. It uses an inflation rate of XXXX% per 52 weeks on the A coin supply, compounded daily. When ending the stake, the contract goes through each day of the contract term and aggregates a total payout based on the percentage of B-shares the users owns against the total supply of B-shares. The contract mints the new A coin and credits the contract holder.

The smart contract does not hold any A coins in reserve to send to users. The amounts are calculated and created on demand when the stake is ended.

Users who commit a higher amount of A coins in a stake, and for a longer period of time, will receive comparatively more B-shares.

B-shares are not tokenised and are not transferable or tradeable. The B-shares remain locked in the stake for each user until they trigger the End Stake or other smart contract functions.

During the relevant income years, you participated in the A project by entering multiple stakes with different commitment periods.

After maturing, the stakes you entered paid out the original A coin plus the additional amounts.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 112-20

Reasons for decision

Question 1

Does your commitment of A coins to enable the stake function in the smart contract constitute a disposal event under section 104-10 under the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Your commitment of A coins to enable the stake function in the smart contract does not constitute CGT event A1 under section 104-10 of the ITAA 1997.

Detailed reasoning

Under CGT event A1 in section 104-10 of the ITAA 1997:

• CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1)).
• You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner (subsection 104-10(2)).

A change (or transfer) of ownership to another entity is required for CGT event A1 in section 104-10 to occur.

In the circumstances under consideration, upon engaging the function of the smart contract to 'stake' A coins, the immutable code of the smart contract sends the A coins to an address that does not have a private key (i.e. a burn address). Burning involves a one-way transaction. It is not possible for any party to ever access the tokens in the burn address.

While it may be the case that the purported entity referred to as "A" created the smart contract, it still does not follow that the purported entity becomes the owner of the staked A coins at any stage.

There would be no basis to imply a contractual term transferring ownership of the A coins to the purported entity as the staking arrangement can function without implying such a term (i.e. it is not necessary to give effect to business efficacy). In the absence of an express contractual term transferring ownership to the purported entity (i.e., in the terms and conditions), there has been no change of ownership to another entity.

There are no facts that demonstrate that an entity takes ownership of the A coins once they are sent to the burn address.

In conclusion, your commitment of A coins to enable the stake function in the smart contract does not constitute CGT event A1 under section 104-10 of the ITAA 1997. There has not been a disposal of a CGT asset for the purposes of section 104-10 as there is no change of ownership in the A coins to another entity.

Additional information

Note while CGT event A1 will not occur upon the sending of the A coins to the burn address under the facts of this arrangement, CGT event C2 would occur.

Question 2

Does your receipt of A coins when the stake ends, constitutes the acquisition of a new CGT asset at zero cost base under section 110-25 of the ITAA 1997?

Summary

Your receipt of A coins when the stake ends constitutes the acquisition of a new CGT asset, with a cost base equal to the market value of the property you gave in respect of acquiring it, under section 110-25 of the ITAA 1997.

Detailed reasoning

Your original A coins were sent to a burn address and are taken permanently out of circulation. Therefore, when you obtain A coins upon entering into the end stake function in the relevant contract, these cannot be the same assets you originally had. When you receive the new A coins, you acquire a new CGT asset

In regard to the cost base of the new A coins, under section 110-25 of the ITAA 1997, the cost base of a CGT asset consists of 5 elements, including, relevantly, the first element at subsection 110-25(2):

(a)        The total of any money you have paid to acquire the asset, and

(b)        The market value of any property you gave or was required to give, in respect of acquiring it (worked out as at the time of the acquisition)

The original A coins are considered to be property given for the purposes of paragraph 110-25(2)(b). Your entitlement to the new A coins is contingent on your ownership of the original A coins ending. Therefore, the new A coins would not have a zero cost base but instead would have a cost base equal to the market value of the original A coins worked out at the time the new A coins were acquired.

For an asset you don't acquire from another entity, you are generally taken to acquire it when you start working on the creation of that asset. In the circumstances you describe, we think that is most accurately the time you sent your original A coins to the burn address (the first step in creating the new A coins).

On that basis, we don't think it is necessary to consider the cost base modification rules in Subdivision 112-A of the ITAA 1997 in relation to this arrangement.

Question 3

Are the additional amounts of A coins received at the end of the stake assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

No

Detailed reasoning

The Commissioner notes that while A.com refers to the relevant activities undertaken by A coin holders as 'staking' or 'mining', the activities involve burning and appear to have no direct link to consensus. Despite the descriptions adopted by A.com, it would appear that the relevant activities are significantly different to those considered in the Commissioner's general guidance on staking rewards.

Subsection 6-5(1) of the Income Tax Assessment Act 1997 states that 'your assessable income includes income according to ordinary concepts, which is called ordinary income'.

Subsection 6-5(2) further states that 'if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year'.

Subsection 6-5(4) clarifies that 'in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct'.

Ordinary income has generally been held to include three categories: namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

(a)   are earned

(b)   are expected

(c)   are relied upon, and

(d)   have an element of periodicity, recurrence or regularity.

At the end of the arrangement, you receive new A coins that are meant to represent the amount of the original A coins sent to the smart contract and also additional A coins that represent a payout calculated based on the length of time your A coins have been out of circulation. The additional A coins do not have the obvious characteristics of ordinary income. They are not obviously income from holding property as the original property was burned upon entering into the stake and no longer existed from that point. They are also not obviously income from providing services as you apparently did not provide any relevant service to obtain the additional A coins. None of the other usual categories or characteristics of ordinary income appear relevant in the circumstances you describe. Therefore, the additional A coins received are not assessable income under section 6-5 of the ITAA 1997.

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