Edited version of private advice

Authorisation Number: 1051893989711

Date of advice: 30 September 2021

Ruling

Subject: Capital gains tax

Question

Are you entitled to claim a capital loss for the loss of the money you transferred to a company with the intention of trading in cryptocurrency?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You began investing in cryptocurrency.

You invested an amount of money which was converted to USD in order to trade on your chosen cryptocurrency trading platform.

The trading you believed was being carried out by the platform resulted in 'profits' being added to you balance on the platform.

In the middle of the following year you were advised had a substantial equity balance.

You attempted to withdraw the majority of funds and leave the remainder of the funds to enable trading to continue however, the company advised you that they would not enable the transfer unless a 'Tax' was paid to them.

You attempted to obtain the transaction history of your account but were advised that as you had not paid the relevant 'Tax', your account would be closed.

You only deposited money with the trading platform and did not transfer any cryptocurrency to them.

You did not receive any money or cryptocurrency from the trading platform.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 116-60

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (TAA 1997) allows a deduction for expenditure to the extent that it is incurred in the gaining or producing of assessable income, or in the carrying on of a business to gain or produce assessable income. No deduction is allowable to the extent that the expenditure is private, domestic or capital in nature.

The funds which you lost were to be used to purchase capital gains tax (CGT) assets. Funds which are used to purchase CGT assets are capital in nature, therefore the loss of these funds retains this capital nature. As such, no deduction is allowable for the losses you have made for your investments.

Capital gain

Capital gains tax (CGT) event A1 happens if you dispose of a CGT asset.

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 Income Tax Assessment Act 1997 (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, it is accepted that your investment may be a scam as the company you invested with refused to transfer funds from your account, demanded further money from you to pay them capitals gains tax and, after you refused to pay the tax, have advised you that they will be closing your account which will result in the loss of both your original investment and the proceeds apparently generated from trading.

It is appropriate to consider that the persons managing your account to have been your agent in facilitating the transactions made to acquire the proceeds.

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

Therefore, you are not required to declare the amount you would have otherwise received as a capital gain.

Capital loss

A capital loss can only arise if a capital gains tax (CGT) event happens. Most CGT events involve a CGT asset. The gain or loss is made at the time of the CGT event.

As a result of entering into the arrangement with the company, it is considered that you acquired contractual rights. These contractual rights are CGT assets for the purposes of paragraph 108-5(1)(b) of the ITAA 1997.

The CGT event relevant in your situation is CGT event C2- cancellation, surrender and similar endings.

CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being cancelled, surrendered, released, discharged, satisfied or abandoned. (paragraph 104-25(1)(b) of the ITAA 1997).

In DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423; [1978] HCA 12 it was recognised that a contract can come to an end merely by being treated as being at an end by the parties. It was held in Fitzgerald v. Masters (1956) 95 CLR 420 at 432 that:

Where an inordinate length of time has been allowed to elapse, during which neither party has attempted to perform, or called on the other to perform, it may be inferred that the contract has been abandoned. What is really inferred in such a case is that the contract has been discharged by agreement, each party being entitled to assume from a long-continued ignoring of the contract on both sides that (in the words of Rowlatt J.) the matter is off altogether.

Conclusion

In your case, you have been advised that your account will be closed by a representative of the company. In addition, your attempts to arrange a transfer of the funds within the account have been unsuccessful.

The other party have not performed their part of the contract and you have determined you are the victim of a scam transaction. You have not been able to recover the original payment for investment.

Based on advice from representatives of the company, it may be inferred that the contract has been abandoned with the effect that your rights under the contract have ceased. Therefore, CGT event C2 in section 104-25 of the ITAA 1997 has happened and you will be entitled to a capital loss of equal to your original investment.

A capital loss cannot be offset against income from other sources but must be offset against capital gains and may be carried forward to offset against future capital gains.