Edited version of private advice

Authorisation Number: 1051581160813

Date of advice: 20 September 2019

Ruling

Subject: Cryptocurrency - personal use

Question

Will the capital gain made by you on the disposal of the cryptocurrency be disregarded as personal use assets?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2018

Year ended 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2017

Relevant facts and circumstances

In your case you became aware and interested in Cryptocurrency through your university course.

Cryptocurrency was actively discussed on computer and cryptography forums.

You began mining cryptocurrency.

You acquired X Cryptocurrency A when participating in mining cryptocurrency while studying and testing hardware.

You developed the program as a hobby for fun and recreation.

The value of the Cryptocurrency at this time was negligible.

You began mining in some years ago and continued on and off for a few years.

Later you wanted to close the program, so you closed your account with the mining pool and placed the cryptocurrency into your wallet.

You were alive to having an asset of limited value and you put it to one side until you heard reference to it on the news after a few years.

Later you sold some of the Cryptocurrency for a large profit.

You subsequently purchased personal use assets using some of the proceeds.

You still hold some cryptocurrency.

Relevant legislative provisions

Income Tax Assessment Act 1936

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

Reasons for decision

No, your Cryptocurrency A are not personal use assets in accordance with subsection 108-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

You have held the cryptocurrencies until you have made a substantial gain. Therefore, the capital gain made on the disposal of the tokens cannot be disregarded, and must be included in your income tax return as assessable income.

However, if you hold your cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount to reduce a capital gain you make when you dispose of it.

Detailed reasoning

Cryptocurrency A 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 Income Tax Assessment Act 1997 (TAA 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 cryptocurrency 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 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 (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 a 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.

Cryptocurrency A are intangible assets; they are a digital representation of value and a bundle of rights (TD 2014/26).

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, which 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 if 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 cryptocurrency is disposed of (for example, whether the cryptocurrency is used to purchase an investment) when considering if cryptocurrency 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 became aware and interested in Cryptocurrency through your university course. You were developing a program.

Cryptocurrency was actively discussed on computer and cryptography forums.

You began mining Cryptocurrency so that you could use to test your program.

Your initial mining was as a hobby and for fun, and the Cryptocurrency you acquired was minimal in value.

Use and intention during the ownership period

Whilst the initial intent may not have been for a speculative investment it does not follow that, at some point speculative investment has not occurred.

After a short time you brought the project to a close and closed your accounts. You took steps to keep your Cryptocurrency safe. You kept the Cryptocurrency in a wallet.

During the period of ownership the Cryptocurrency increased in value. Cryptocurrency was openly discussed in the general public and you were fully aware of the increase in value during the period you held the asset, particularly when it was sold.

Length of time asset owned

The longer the period of time that a cryptocurrency is held, the less likely it is that it will be a personal use asset. You held the Cryptocurrency from a number of years after it was mined.

Disposal

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

Cryptocurrency A are intangible assets; they are a digital representation of value and a bundle of rights.

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.

You disposed of some Cryptocurrency in exchange for Fiat currency and deposited the funds into an account.

If we consider it from the point in time where you received or purchased the Cryptocurrency, the most prolific function of the Cryptocurrency was the rise in value.

Further, given the inherent nature of 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 acquired, and, the fact that the you have held on to them, demonstrates that you have not used them mainly for personal use.

The Cryptocurrency that you sold are not personal use assets.

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

As you have held your Cryptocurrency for more than 12 months you are eligible for the 50% Capital Gains Tax Discount.