Edited version of private advice

Authorisation Number: 1051581846123

Date of advice: 25 September 2019

Ruling

Subject: Cryptocurrency - personal use - non-resident

Question

Is the disposal of your mined cryptocurrency disregarded as personal use assets?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Reasons for decision:

You held a highly technical interest in computers networks and their applications, including cryptography.

Some years ago before you became an Australian resident you purchased a set of high end graphics cards that served two purposes

1.    To provide the best in class gaming experience

2.    To mine Cryptocurrency (Crypto A)

You mined Crypto A for approximately X months.

During this period you were a non-resident of Australia for taxation purposes.

Later you purchased X Crypto A through a shopfront via and on-line exchange.

The Crypto A were intended to be used to procure computer hardware (Hardware).

However, the sale did not go through and the Crypto A were returned to you.

You purchased Crypto A while you were a non-resident of Australia.

You arrived in Australia in XXXX and became a resident of Australia for taxation purposes.

Your spouse and family lived overseas with you and they arrived in Australia in XXXX.

In XXXX at the time when the media hype for Crypto A was at an all-time high you took the opportunity to sell some of your Crypto A.

In XXXX and XXXX you also sold some more of your Crypto A.

You converted the Crypto A into Australian Dollars and purchased:-various personal items

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-20

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

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 118-10

Income Tax Assessment Act 1997 section 855-45

Income Tax Assessment Act 1936 section 160B(1)

Reasons for decision

Summary

Are the disposals of your Crypto A disregarded as personal use asset?

No

Your Crypto A are not personal use assets and therefore the disposal of the Crypto A cannot be disregarded.

Section 118-10 of the Income Tax Assessment Act 1997 (TAA 1997) says that gains from personal use assets are disregarded if the first element of the cost base is less than $10,000. 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.

Section 855-45 of the ITAA 1997 sets out the CGT consequences of a foreign resident individual becoming an Australian resident. Your Crypto A are taken to have been acquired at the time of becoming an Australian resident, the first element of the cost base and reduced cost base of the asset are its market value at that time. Further, if you held the assets for more than 12 months you can use the discount method when calculating your capital gain.

Detailed reasoning

Cryptocurrency

Cryptocurrency 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 ITAA 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 bitcoin 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, 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 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. 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, 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 it 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 bitcoin is disposed of (for example, whether the bitcoin is used to purchase an investment) when considering if bitcoin 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.

In your case you received some of your Crypto A while you were overseas through mining. You purchased some Crypto A to purchase the hardware, however when the sale fell through you did not convert the Crypto A back to fiat.

When you returned to Australia you held your Crypto A on investment.

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

Where you exchange your Crypto A to Australian Dollars or any fiat currency this strongly indicates the Crypto A you own was acquired, held and used for a purpose other than personal use or enjoyment.

During the period of ownership the main your Crypto A increased in value. You sold your Crypto A at opportune times based on media hype and market factors. You have not used your Crypto A to directly purchase online products for your personal needs, such as clothing or music. You converted your Crypto A to Australian Dollars prior to using the funds.

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 purchased, and, the fact that the you have held on to them a number of years demonstrates that you have not used them mainly for personal use.

Where you have sold your Crypto A, they are not subject to the personal use exemption and will be subject to capital gains tax.

Where you have not yet disposed of your Crypto A based on the facts provided and circumstances as described we are of the opinion that on disposal your Crypto A will not be subject to the personal use exemption, and will be subject to capital gain tax.

Section 855-45 of the ITAA 1997 sets out the CGT consequences of a foreign resident individual becoming an Australian resident. If an individual becomes an Australian resident then, for each CGT asset that was owned just before the individual or company became an Australian resident:

(1) the asset is taken to have been acquired by the individual at the time of becoming an Australian resident, and

(2) the first element of the cost base and reduced cost base of the asset at the time of becoming an Australian resident is its market value at that time.

This provision is designed to ensure that gains which accrued on those assets while the person was a foreign resident will be excluded from the CGT provisions.

Therefore, the first element of the cost base for your Crypto A is the market value of Crypto A when you became an Australian resident.

Division 115 of the ITAA 1997 provides the regulations regarding discount capital gains. Section 115-25 says to apply a discount capital gains the CGT asset must be (taken to be) acquired at least 12 months prior to the CGT event occurring.

Therefore, if you hold the Crypto A as an investment for 12 months or more from the date of residency in Australia, you may be entitled to the CGT discount.