Edited version of private advice

Authorisation Number: 1051882521018

Date of advice: 1 September 2021

Ruling

Subject: Investment schemes

Question 1

Is your account with Platform A subject to the foreign exchange gains and losses (forex) rules in Division 775 of the ITAA 1997 so that any forex realisation gains are included in your assessable income and any forex realisation losses allowable as a deduction?

Answer

Yes.

Question 2

Did CGT disposal event A1 under subsection 104-10(1) of the ITAA 1997 happen when you made each transfer of cryptocurrency to your account with Platform A?

Answer

Yes.

Question 3

Did you make a capital loss on your account with Platform B?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Platform A

You signed up with Platform A via the web and commenced transferring funds to your account.

From the information provided by Platform A, the account was denominated in US currency.

You made in between XX and XXX deposits into your account with Platform A. The transfers were either by AUD, foreign fiat currency (FFC)or a crytpocurrency (CC).

You made in between XX and XXX withdrawals from the account with Platform A.

Following the last withdrawal, you endeavoured to make other withdrawals; however, you received auto replies saying that there were technical problems that prevented your withdrawals from being processed.

The link to your account was subsequently removed from the website.

You tried emailing the platform; however, you received the same auto reply. The contact phone number was also removed from the website.

You received two statements from the platform which purported to show profitable trading from contracts for difference trades; however, you believe these transactions were most likely fictitious. You believe the platform was more like a Ponzi scheme.

You have provided web links from several regulators in different countries warning about Platform A.

Platform B

You entered into various so called 'mining contracts' with Platform B and made several transfers of CC to your account with the platform.

The platform offered regular returns of income under the contracts; however, you only received one small amount early on and nothing after that.

Following your last transfer of CC, it appeared that the platform was a scam, as the last signed contract you entered into was not returned to you.

The platform subsequently ceased all communication and became uncontactable. The website was taken down a week or so later.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 subsection 104-10(1)

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

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 116-60

Income Tax Assessment Act 1997 Division 775

Reasons for decision

Question 1

The forex measures in Division 775 of the ITAA 1997 set out rules for expressing the Australian currency values of amounts that are denominated in foreign currency and explain how to calculate gains and losses that are attributable to currency exchange rate fluctuations. The measures treat many of those gains and losses as assessable income or allowable deductions.

Under the forex measures:

• assessable gains are referred to as 'forex realisation gains'
• deductible losses are referred to as 'forex realisation losses'
• forex realisation gains and losses only arise when 'forex realisation events' happen.

In your case, you held an account with Platform A which was denominated in a foreign currency. You made various deposits to the account. Therefore, each of the deposits made to the account represented a right to receive foreign currency.

Forex realisation event 2 (FRE 2) occurs when you cease to have a right, or part of a right, to receive foreign currency. A right to receive foreign currency includes a right to receive an amount of Australian currency that is calculated by reference to an exchange rate. The term 'right' includes a right that is contingent upon something happening.

The right, or part of a right, must cease, and be one of the following:

•         a right to receive income, or a right that represents ordinary income or statutory income, other than under the capital gains tax (CGT) provisions

•         a right created in return for ceasing to hold a depreciating asset

•         a right created or acquired for paying or agreeing to pay Australian or foreign currency

• a right created in return for a realisation event happening for a CGT asset.

FRE 2 happens when you cease to have the right; commonly when a right to receive foreign currency is satisfied by the actual receipt of that currency. The amount you are entitled to receive is called the 'forex cost base'.

You make a forex realisation gain if the value of the foreign currency received when the event happens exceeds the amount you were entitled to receive to the extent that the gain is due to a currency exchange rate effect. You make a forex realisation loss if the value of the foreign currency received when the event happens is less than the amount you were entitled to receive.

In your case, when you subsequently made withdrawals from the account, you ceased to have a right, or part of a right, to receive foreign currency. Therefore, you are required to calculate a forex realisation gain or loss at the time of each withdrawal.

Question 2

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? explains that Bitcoin, and by extension, cryptocurrency in general is a CGT asset.

The disposal of cryptocurrency that is not part of a business or commercial transaction will give rise to CGT disposal event A1 under subsection 104-10(1) of ITAA 1997. A capital gain or loss is worked out at the time of disposal.

The capital gain or loss is the difference between the cost base (which includes the acquisition cost of the CGT asset) and the capital proceeds from the CGT disposal event.

The capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the event happening, or the market value of any other property you have received or are entitled to receive.

In your case, you made transfers of CC to your your account with Platform A. As the value of the CC was not held in the account as CC, but as a foreign currency, you have disposed of the CC which triggered CGT event A1.

Therefore, you are required to work out a capital gain or loss on the day the CC was transferred to the account.

Question 3

When you transferred CC to your account with Platform B, you were taken to have disposed of the BTC which triggered CGT disposal event A1.

As mentioned above, the capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the event happening, or the market value of any other property you have received or are entitled to receive.

Section 116-60 of the ITAA 1997 provides that the capital proceeds from a CGT event are reduced if your employee or agent misappropriates (whether by theft, embezzlement, larceny or otherwise) all or part of those proceeds. The capital proceeds are reduced by the amount misappropriated. An agent can be described as someone who acts on behalf of another.

Based on the information provided, although you received an initial payment, it is accepted that your investment turned out to be a 'scam' as Platform B eventually ceased all communication and the company website was also taken down. Therefore, the CC you transferred to the platform was lost.

Further, it is appropriate to consider that the person(s) running the platform to have been your agent in 'managing' your 'investment'.

Consequently, the capital proceeds you were entitled to receive from the CGT disposal event are reduced to zero by the operation of section 116-60 of the ITAA 1997.

Therefore, you are entitled to claim a capital loss for the disposal of the CC you transferred to your account at Platform B.

If your allowable capital losses are greater than your capital gains, you have a net capital loss. You cannot deduct a net capital loss from your income, but you can carry it forward and deduct it from capital gains in later years. There is no time limit on how long you can carry forward a net capital loss.