Edited version of private advice

Authorisation Number: 1051490734976

Date of advice: 30 May 2019

Ruling

Subject: Cryptocurrency - chainsplits - personal use asset

Question 1

Is the Forked A a new asset?

Answer

Yes

Question 2

Will the first element of your cost base or reduced cost base in CRYPTO A be AUD $X,XXX?

Answer

Yes

Question 3

Are your CRYPTO A, Forked A, and Forked B CGT Assets?

Answer

Yes

Question 4

Will your disposals of CRYPTO A, Forked A, and Forked B be taxed on capital account and not revenue account?

Answer

Yes

Question 5

If the answer to Question 4 is yes, will the personal use asset exemption in section 118-10 ITAA 1997 apply to disregard capital gains derived by you on disposal of the CRYPTO B, CRYPTO A and Forked B?

Answer

No

Question 6

If the answer to Question 4 is yes, will the personal use asset exemption in section 118-10 ITAA 1997 apply to disregard capital gains derived by you on disposal of the Forked A?

Answer

No

Question 7

If the answer to Question 6 is no, will the 50% CGT discount in Subdivision 115-A ITAA1997 apply to reduce capital gains derived by your on disposal of the CRYPTO A, Forked A and Forked B?

Answer

Yes, with the exception of some of the Forked A sales made within 12 months of acquisition.

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

Year ending 30 June 2019

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You and two friends equally purchased XX,XXX of a Cryptocurrency (CRYPTO A) at the crowd sale. Your share was one third.

In order to purchase the CRYPTO A you purchased another Cryptocurrency (CRYPTO B) a day or two prior. You could only purchase CRYPTO A with CRYPTO B.

You were interested in and your intention was to learn about the Cryptocurrency network.

You read the Cryptocurrency Product Purchase Agreement.

A chainsplit occurs (Chainsplit "A"). Two separate tokens were available (Forked A) and (Forked B), following the Chainsplit "A".

Forked B is first listed on an exchange shortly after the Chainsplit "A".

Immediately prior to the Chainsplit "A" you held an amount of CRYPTO A on an exchange. This exchange automatically facilitated your receipt of Forked B. As such you obtained the same amount of Forked B as a result of the exchange automatically facilitating your receipt of Forked B.

The further Forked B was never received.

After the Chainsplit "A", you downloaded an updated wallet/client. Following this, you obtained the same amount of Forked A as you held CRYPTO A prior to the Chainsplit "A".

You consider that the Forked B which you could have received, but did not receive, from the Chainsplit "A" to be lost.

You have sold some of your cryptocurrency.

Since then a number of Chainsplits have occurred

You purchased and sold additional cryptocurrencies over the next few years.

Your Forked A are kept in separate wallets from the rest of your Cryptocurrency.

You do not currently hold any Forked B.

You have sold some of the Forked A which represents your holding of CRYPTO A.

Your Forked A has been moved to a cold storage device.

You were and are employed.

You did not keep records but you have been able to reconstruct them.

You have tried to dispose of your Forked A but due to liquidity restraints imposed by the Australian exchanges you have not been able to do so in one transaction.

When you dispose of the Forked A you will:

·         purchase a home to live in

·         donate to a Private ancillary fund or charitable purpose

·         use for miscellaneous day to day expenses, such as bills, clothing, entertainment expenses and food and drink for consumption.

You are not going to exchange the Forked A for

·         Fiat currency, which you will use to purchase an investment asset or in any business that you carry on

·         Any other Cryptocurrency

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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

Income Tax Assessment Act 1997 Subsection 108-20(2)

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Subsection 110-25 (1)

Income Tax Assessment Act 1997 Subsection 110-25 (2)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Subdivision 115-A

Income Tax Assessment Act 1997 Section 118-10

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1936 Section 160B(1)

Reasons for Decision

Question 1

Is the Forked A a new asset?

Answer:

Yes

A chain split or hard fork is a software update that introduces a new rule which isn't compatible with the legacy network'.

As a general proposition, if one of the post-Chainsplit "A" blockchains has the same rules as the original chain then it would be the continuation of the original chain. If a blockchain has new rules and is not compatible with the original rule then it would be seen as the new blockchain and the tokens received seen as new assets.

In this case Forked A blockchain is the new blockchain, therefore Forked A token is the new token arising as a result of the chain split.

The B blockchain is the continuation of the original chain and that Forked B is the continuation of the original token.

Question 2

Will the first element of your cost base or reduced cost base in CRYPTO A be AUD$ X,XXX?

Answer:

Yes

Subsection 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that there are five elements to a cost base:

The first element is defined by subsection 110-25(2) which says that it is the total of money you paid to acquire it and the market value of any other property given to acquire it.

CRYPTO A

In your situation the first element of the cost base for the CRYPTO A is the equivalent to the market value of the property given to acquire the asset.

You could not purchase CRYPTO A with money; you could only purchase CRYPTO A with CRYPTO B. The market value of the CRYPTO B is the first element of the cost base of CRYPTO A.

Forked A

If you hold cryptocurrency as an investment, and receive a new cryptocurrency as a result of a chain split (such as Bitcoin Cash being received by Bitcoin holders), you do not derive ordinary income or make a capital gain at that time as a result of receiving the new cryptocurrency.

If you hold the new cryptocurrency as an investment, you will make a capital gain when you dispose of it. For the purposes of working out your capital gain, the cost base of a new cryptocurrency received as a result of a chain split is zero. If you hold the new cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount.

Therefore in your case the Forked A cost base is $0

Forked B

If a cryptocurrency you hold after a chain split has the same characteristics as your original cryptocurrency (it is a continuation of the original asset), then the first element of the cost base of that cryptocurrency will be the cost base of the original cryptocurrency. In this case Forked B is a continuation of the original asset. The cost base of your Forked B will be what you originally paid for your CRYPTO A.

Question 3

Are your CRYPTO A, Forked A, and Forked B CGT Assets?

Answer:

Yes

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 (ITAA 1997)? (TD 2014/26) paragraph 1 states that Bitcoin is a CGT asset for the purposes of subsection 108-5(1) of the ITAA 1997.

ATO guidance paper "Tax treatment of crypto-currencies in Australia - specifically bitcoin" confirms that the tax treatment of bitcoin can be applied to other crypto or digital currencies that have the same characteristics as bitcoin.

Question 4

Will your disposals of Forked A and Forked B be taxed on capital account and not revenue account?

Answer:

Yes

Summary

The sales of CRYPTO A, Forked A or Forked B are capital in nature.

You plan to sell the cryptocurrency only at opportune times, therefore your activities will not possess the necessary elements of periodicity, recurrence or regularity that are common to receipts of revenue.

Further, the proposed sales will not constitute income from the provision of personal services, and are notderived directly from a business activity.

Detailed Reasoning

Revenue vs Capital

There are three ways profits from sales of cryptocurrency can be treated for taxation purposes:

1. As ordinary income under section 6-5, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock; or
2. As ordinary income under section 6-5, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose; or
3. As statutory income under the capital gains tax legislation.

Are you carrying on business?

The common law has identified a number of indicators that are relevant in determining whether a taxpayer's activities constitute the carrying on of a business. The question whether a taxpayer's activities should be characterised as a business is primarily a matter of general impression and degree (Ferguson v. Federal Commissioner of Taxation 79 ATC 4261; (1979) 9 ATR 873).

The courts have held that the following indicators are relevant to the question of whether a taxpayer's activities amount to the carrying on of a business:

(a) whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

(b) whether the taxpayer has more than just an intention to engage in business;

(c) whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

(d) whether there is repetition and regularity of the activity;

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

(f) whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

(g) the size, scale and permanency of the activity; and

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

In your situation you invested a small amount of money in cryptocurrency for experimental and learning purposes, and through the investment you have made a gain.

You have not maximised your gain to its full potential.

You have kept basic records and did not operate in business-like manner.

Your activities are not of a size and scale, nor were they conducted routinely and systematically enough to be considered of a commercial nature.

Overall, from the facts provided, your activities as conducted did not, and, do not constitute carrying on a business of trading in cryptocurrency.

Profit making Undertaking or Plan

Revenue from profit arising from the carrying on or carrying out of a profit-making undertaking or plan is assessable income according to Section 6-5 ITAA 1997.

We look at TR 92/3 Income tax: whether profits on isolated transactions are income states that a profit from an isolated transaction is generally income when both of the following elements are present

a)    The intention was to make a profit or gain, and

b)    It was entered into and a profit was made in the course of carrying out a business operation or commercial transaction

While not necessarily the sole intention, the activity has to have profit-making as a significant purpose.

In your case, however, the experimental nature of your activities and the fact that you have not sought or sold all the cryptocurrency available to you are factors that indicate that these activities are not indicative of a profit-making undertaking or plan.

Therefore the conclusion is that in this case, your activities do not amount to carrying on a business and that any amounts received on your existing or proposed sales of CRYPTO A, Forked A and Forked B will not be the result of a profit-making undertaking or plan.

Capital Account

The basic CGT provisions are contained in Part 3-1 of the ITAA 1997. Broadly, these provisions include in your assessable income any assessable gain made when a CGT event happens to a CGT asset that you own (to the extent they are not reduced by capital losses).

A CGT asset is any kind of property or a legal or equitable right that is not property. Cryptocurrencies are CGT assets. CGT event A1 under section 104-10 happens if you dispose a CGT asset. You make a capital gain if your capital proceeds exceed the CGT asset's cost base.

Section 118-20 contains anti-overlap provisions which operate to reduce capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 of the ITAA 1997, for example, as ordinary income under section 6-5 of the ITAA 1997.

In your case the income from your proposed and existing sales of your cryptocurrencies are not realised on revenue account (ordinary income) under section 6-5, but are assessable under Part 3-1 ITAA 1997.

Thus the gains from your CRYPTO A, Forked A and Forked B are realised on only capital account.

Question 5 and Question 6

If the answer to Question 4 is yes, will the personal use asset exemption in section 118-10 ITAA 1997 apply to disregard capital gains derived by you on disposal of the CRYPTO A and B?

Answer:

No

If the answer to Question 4 is yes, will the personal use asset exemption in section 118-10 ITAA 1997 apply to disregard capital gains derived by you on disposal of the Forked A?

Answer:

No

Section 108-20 ITAA 1997 says that Personal use assets are CGT assets, other than collectables, that are used or kept mainly for the personal use or enjoyment of you or your associates.

When the CGT provisions of the 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

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.

ID 2002/795 defines mainly as meaning predominantly, chiefly, principally, or for the most part.

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, business or profit-making purposes. The two categories are mutually exclusive.

TD 2014/26 states that Bitcoin that is kept or used mainly for the purpose of profit making or investment is not kept for personal use.

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 (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.

In this case the main function is to runs smart contracts. Smart contracts are computer protocols that facilitate and enforce the performance of a contract without any possibility of downtime, censorship, fraud or third party interference. This enables developers to create markets, store registries of debts or promises move funds in accordance with instructions.

You have not been able to show how you have used, or intended to use the ability to run smart contracts for your own personal use.

Timing

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

Further TD 2014/26 states "An example of where bitcoin would be considered to be a personal use asset is where and 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."

If you exchange a cryptocurrency 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 owned was acquired, held and used for a purpose other than personal use or enjoyment.

CRYPTO B, CRYPTO A and Forked B

The CRYPTO B you originally acquired was only to purchase the CRYPTO A. Therefore if the CRYPTO A was used for personal use, it may hold that it too was held for personal use.

However, in your case the CRYPTO A was held for two years before the chain split occurred. The original blockchain Forked B, was disposed of to purchase other assets and not for personal use.

Therefore we believe that the disposal of CRYPTO B, CRYPTO A, and Forked B are not subject to the personal use exemption, and capital gains applies

Forked A

In your case you wish to use the purchase the following with your Forked A to:-

·         purchase a home to live in

·         donate to a Private ancillary fund or charitable purpose

·         use for miscellaneous day to day expenses, such as bills, clothing, entertainment expenses and food and drink for consumption.

You are not going to exchange the Forked A for

·         Fiat currency, which you will use to purchase an investment asset or in any business that you carry on

·         Any other Cryptocurrency

The definition of a personal use asset also has regard to the purpose for which an asset is kept. In this case, you are keeping the Forked A to sell at opportune times based on market factors.

Your initial investment would not have been sufficient to purchase these items without factoring in a considerable increase in investment.

You have not yet been able to demonstrate how you would use Forked A for personal use.

By their nature it would be hard to see how these particular cryptocurrencies could be used for personal use, as a developer creating markets, storing registries of debts or promises to move funds in accordance with instructions are generally not private activities. It would be hard to justify that enforcing contract performance could be seen as a private activity.

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 Forked A will not be subject to the personal use exemption, and will be subject to capital gain tax.

Further, if we consider it from the point in time where you received the coins, the most prolific function of the CRYPTO A, Forked A or Forked B was the rise in value.

Given the inherent nature of it is that it is either used as a means of exchanging it for something of value, (to facilitate smart contracts) or it is kept as a speculative investment, the fact that the you have held on to it for almost four years demonstrates that you have not used them mainly for personal use.

Question 7

If the answer to Question 5 is no, will the 50% CGT discount in Subdivision 115-A ITAA 1997 apply to reduce capital gains derived by you on disposal of the CRYPTO A, Forked A and Forked B?

Answer:

Yes with the exception of some Forked A sales.

The time a CGT asset is acquired is important as it determines whether you are eligible for the CGT discount.

You acquire a CGT asset when you become its owner (section 109-5 ITAA 1997). In the case of a CGT event A1, you acquire the asset when the disposal contract is entered into.

Whether you purchased your cryptocurrency or acquired them through the chain split the date you acquired the asset is the date you became the owner.

If you hold cryptocurrency as an investment, and receive a new cryptocurrency as a result of a chain split (such as Bitcoin Cash being received by Bitcoin holders), you do not derive ordinary income or make a capital gain at that time as a result of receiving the new cryptocurrency.

If you hold the new cryptocurrency as an investment, you will make a capital gain when you dispose of it. For the purposes of working out your capital gain, the cost base of a new cryptocurrency received as a result of a chain split is zero. If you hold the new cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount.

Discount capital gains

An assessable capital gain may be reduced by the CGT discount in Division 115. To be a discount capital gain, a capital gain must:

·         be made by an individual, a complying superannuation entity, a trust, or by a life insurance company from a CGT event in respect of a CGT asset that is a complying superannuation/First Home Saver Account (FHSA) asset;

·         result from a CGT event happening after 11.45 am EST on 21 September 1999;

·         be worked out without the cost base being indexed; and

·         result from a CGT event happening to a CGT asset owned by the taxpayer for at least 12 months.

Taxation Determination 2002/10 advises that the 12-month period does not include the day of acquisition and the day of disposal.

Rate of discount

A discount capital gain remaining after applying any current year or prior year capital losses is reduced by the discount percentage when working out your net capital gain. The discount percentage is 50% if the gain is made by an individual or a trust.