Edited version of private advice

Authorisation number: 1052337580015

Date of advice: 12 December 2024

Ruling

Subject: Trading in contracts for difference

Question

Are losses incurred by you in the 20XX income tax year from trading in Contract for Difference (CFD) deductible under section 25-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

You invested in CFD trading company by converting over $XXX into XX dollars.

The XX dollars were then added to your crypto wallet, which allows you to invest in foreign currencies and cryptocurrencies using the CFD trading company's market platform.

The CFD trading company's market platform allows you to trade in contracts for difference by speculating on the rising or falling prices of fast-moving global financial markets (or instruments) such as shares, indices, commodities, currencies and cryptocurrencies.

You had an account with the CFD trading company that was linked to your crypto wallet.

You undertook your CFD trading activities alongside your regular full-time employment.

You were the only person who had access to your crypto wallet and could invest on the market platform using your crypto wallet.

Before you commenced investing, you received regular training and advice from an account manager representing the CFD trading company.

You have used other resources provided by the CFD trading company for further training and understanding of how the market platform works.

All trades have been made only after market analysis of trade movements identified by market analysts and your discussions with your account manager.

Investment risks were calculated by the account manager based on advice from market analysts, and you were aware of the risks before entering into the transactions.

Your intention was to supplement your income from employment.

You lost your entire investment by the end of the income tax year ended 30 June 20XX.

The CFD trading company keeps all records of your transactions.

Each trade has an ID number and all details relating to the trade can be traced.

You provided details of all your transactions.

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 15-15

Income Tax Assessment Act 1997 section 25-40

Reasons for decision

Tax treatment of CFD trading

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference (TR 2005/15) outlines the tax consequences of entering into a financial contract for differences (CFD).

Paragraphs 11 - 15 of TR 2005/15 provide the following guidance on the tax implications of gains and losses from CFDs:

11. A gain from a financial contract for differences will be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where the transaction is entered into as an ordinary incident of carrying on a business, or where the profit was obtained in a business operation or commercial transaction for the purpose of profit making.

12. A loss from a financial contract for differences will be an allowable deduction under section 8-1 of the ITAA 1997 where the transaction is entered into as an ordinary incident of carrying on a business or in a business operation or commercial transaction for the purpose of profit making.

13. A gain from a financial contract for differences will be assessable income under section 15-15 of the ITAA 1997 where a taxpayer enters into a financial contract for differences in carrying on or carrying out a profit-making undertaking or scheme, and the gain from it is not assessable under section 6-5 of the ITAA 1997.

14. A loss from a financial contract for differences where the gain would have been assessable under section 15-15 of the ITAA 1997 is an allowable deduction pursuant to section 25-40 of the ITAA 1997.

15. A gain or loss from a financial contract for differences entered into for the purpose of recreation by gambling will not be assessable income under section 6-5 or section 15-15 of the ITAA 1997 or deductible under section 8-1 or section 25-40 of the ITAA 1997. A capital gain or capital loss from a financial contract for differences entered into for the purpose of recreation by gambling will be disregarded under paragraph 118-37(1)(c) of the ITAA 1997.

Each case must be judged on its own particular facts and the determination of the question is generally a result of a process of weighing all the relevant indicators together to form a general opinion of whether a business is being carried on or the activities are commercial transactions.

The determination of Carrying on a business of CFD trading is outlined in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11). The principles are not restricted to questions of whether a primary production business is being carried on. This is the Commissioners view of what factors to determine if a taxpayer is in business for tax purpose.

Paragraph 13 of TR 97/11 states that the courts have held that the following indicators are relevant to determining the question whether a business is being carried on:

•                     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.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impression gained from examination of the facts (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). The weighting to be given to each indicator may vary from case to case.

The application of the indicators from TR 97/11 presented above to your circumstances is outlined below.

Whether the activity has a significant commercial purpose or character.

TR 2005/15 indicates that the trading of CFD's is essentially a commercial activity. The purpose of your trading was to make a profit without the use of a broker or staff, as only you had access to your crypto wallet and could invest on the market platform using it.

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

The intention of the taxpayer in engaging in the activity is a relevant indicator in determining whether a business is being carried on.

The Full Federal Court in Ferguson v Federal Commissioner of Taxation (1979) 26 ALR 307 stated that:

'The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant.'

Your employment remained your main source of income throughout the period during which you traded CFDs. Therefore, the Commissioner does not consider that you demonstrated a clear intention to engage in CFD trading as a business.

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

This indicator is directed at determining whether the taxpayer entered into the activity with an intention to make a significant commercial or financial gain from it. In Hope v The Council of the City of Bathurst (1980) 144 CLR 1; 80 ATC 4386; (1980) 12 ATR 231, Mason J states that business activities are usually activities that are 'engaged in for the purpose of profit on a continuous and repetitive basis'.

The intentions of the taxpayer are ascertained from looking objectively at their actions, including any arrangement entered into. All of the income expected to be received from, and all of the costs associated with, the activity are taken into account to determine what profit, if any, is expected.

It is important to show how the activity can make a profit. However, stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. This was the situation in FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331.

You stated that you used the advice of your account manager. Your account manager used market analysts to determine the movement of Stocks. The analysts looked at daily reports, global events, movements, market, business and company reports, updates, etc. to determine which stocks to trade and when.

Whether there is repetition and regularity of the activity including the size, scale, and permanency of the activity.

As there is no ownership of the underlying asset when trading CFDs, the size of the taxpayer's profit and loss can help to determine the size and scale of the trading activity.

Your motivation for trading CFDs was to supplement your employment income. You did not intend to make CFD trading your main source of income.

You have invested a significant amount of money in your CFD trading activities. As a result, your loss is also significant.

The frequency of your trades was changing, depending on the advice you received from your account manager. However, the number of your transactions indicates regularity and repetition.

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

In considering whether the activity is better described as recreational, there must be evidence that CFD trading is for recreational purposes such as a hobby or gambling. Paragraph 87 of TR 97/11 describes circumstances, including evidence that the taxpayer does not intend to make a profit and there is no system in place to allow a profit to be made in the conduct of the activity.

You have stated that you received training before you started trading and that you relied on investment advice when trading, which is evidence that you intended to make a profit from trading CFDs. Therefore, the Commissioner does not consider the activity to be recreational.

Conclusion

Having considered the facts, the Commissioner does not consider that you were engaged in the business of trading CFDs. Nor was your CFD trading undertaken for recreational or gambling purposes. Your CFD activities were clearly undertaken with a view to making a profit and therefore your gains from trading CFDs are assessable under section 15-15 of the ITAA 1997 and your losses are deductible under sections 25-40 of the ITAA 1997 in the year in which they arise.

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