Edited version of private advice

Authorisation Number: 1051950624284

Date of advice: 16 February 2022

Ruling

Subject: Non-commercial losses - special circumstances

Question 1

Are you carrying on a business of cryptocurrency trading?

Answer

Yes.

Question 2

Will the Commissioner exercise the discretion in section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your share trading activity in the calculation of your taxable income for the 2021 income year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You do not satisfy the under $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You commenced trading in cryptocurrency on a specified date.

You decided to commence trading in cryptocurrency after reading a book about Bitcoin and you found the concept interesting.

You saw cryptocurrency as an opportunity to move away from your 9-to-5 job and transform cryptocurrency into a business.

You viewed cryptocurrency trading as a viable business activity due to the volatility of the trading.

Prior to commencing trading in cryptocurrency, you held shares in various organisations. However, for you the share market was not a good place for trading due to the low volatility rate.

You invested a specified amount in cryptocurrency during the stated income year.

You completed a specified number of transactions during the stated income year.

During the stated income year you spent a specified number of hours per week on cryptocurrency.

The majority of your time you spent on cryptocurrency was spent on researching and planning your trades.

You have obtained professional assistance through a subscription service.

You have improved your knowledge and skills in cryptocurrency through YouTube.

In order to preserve your capital and limit your losses you used a stop loss strategy.

You have a business plan.

You provided us with your trading strategy.

You use cryptocurrency software for your record keeping which automatically tracks your transactions and keeps all your accounting records.

You have not been able to find a software program on the market that does deep analytics therefore you will write your own portfolio analysis and management system program.

You had a trading loss of a specified amount in the stated income year due to overtrading and not having enough knowledge of cryptocurrency.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision

Carrying on a business

Where a person trades in cryptocurrency as a business, the associated income is assessable as business income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997). Deductions from carrying on a business are generally deductible under section 8-1 of the ITAA 1997.

However, where a person is not a business, the cryptocurrency will be capital assets and any gains/losses made from the cryptocurrency would be subject to the capital gains provisions. Therefore, it is necessary to consider whether your trading activities are regarded as a business.

Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? ('TR 97/11') outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative but should be weighed up in conjunction with the other factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

•         whether the activity has a significant commercial purpose or character

•         whether the taxpayer has more than just an intention to engaged in business

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•         whether there is regularity and repetition of the activity

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

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

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

•         the size, scale and permanency of the activity, and

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

The fact that a person is carrying on a business in one income year, does not mean that the subsequent years a business is also being carried out. We need to look at the activities carried on in the relevant year.

Applying the relevant indicators to your circumstances

Nature of activity and purpose of profit making

The intention to make profit is not, on its own, sufficient to establish that a business is being carried on. Where a business trading in cryptocurrency exists, there is usually a business plan on how the activities will be conducted.

In your case, you aim to make a profit from trading in cryptocurrency. You have a business plan and you use information from various resources to help you in your cryptocurrency trading decisions. Your trading in cryptocurrency supplemented your full-time employment in the stated income year with the view to resigning from your full-time employment and trading in cryptocurrency on a full-time basis.

Repetition and regularity of the activities

Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions or the number of similar transactions.

In your case you had a number of transactions in the time spent on cryptocurrency in the stated income year. There was regularity to your buying and selling. You spent a specified number of hours per week on your cryptocurrency activities.

Organisation in a business-like manner and the keeping of records

Generally, a business would involve study of trends, analysis or relevant materials and reports, plans to take account of contingencies and market fluctuations and the seeking of advice from experts. As per Case X86 90 ATC 621, this means having or operating on a particular plan with the main goal of maximising profits. If records of purchases and sales of cryptocurrency were not kept; it would be more difficult for a person to demonstrate that a business was being carried on.

You kept records of your cryptocurrency transactions and other relevant details. You used a trading strategy to study and analyse trends.

Volume of trading

A higher volume of purchases and sales of cryptocurrency is more likely to indicate that a business is being carried on.

You had a number of cryptocurrency transactions in the time spent on cryptocurrency in the stated income year.

Conclusion

After weighing up the factors outlined above, it is considered that you are carrying on a business of cryptocurrency trading for income tax purposes for the stated income year. You used various sources of information to help you with your decisions and have kept adequate records. You have had regular trading activities throughout the year. Your injection of capital into cryptocurrency was significant and you had a view to making a profit.

Business losses

Where a person has a business loss, Division 35 of the ITAA 1997 needs to be considered.

Division 35 of the ITAA 1997 applies to losses from certain business activities. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual from a business activity will not be taken into account in an income year unless:

•         the exception in subsection 35-10(4) of the ITAA 1997 applies,

•         you satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 are met, or

•         the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Exception

The exception in subsection 35-10(4) of the ITAA 1997 applies to a primary production business or a professional arts business and where your assessable income for the income year (except any net capital gain) from other sources not related to that activity, is less than $40,000.

In your case, the exception in subsection 35-10(4) of the ITAA 1997 does not apply.

Subsection 35-10(2E) of the ITAA 1997

The income requirement in subsection 35-10(2E) of the ITAA 1997 applies from 1 July 2009 and will be met where the sum of the following amounts for an income year is less than $250,000:

•         taxable income (ignoring losses subject to the non-commercial loss rules)

•         reportable fringe benefits

•         reportable superannuation contributions

•         net investment losses.

You do not satisfy the income requirement contained in subsection 35-10(2E) of the ITAA 1997.

Your losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion under section 35-55 of the ITAA 1997.

Commissioner's discretion

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion ('TR 2007/6'), sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion. There are two discretions available to the Commissioner under section 35-55 of the ITAA 1997: lead time and special circumstances.

1.Lead time

The Commissioner may decide that the loss deferral rule in subsection 35-10(2) does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because the business activity has started to be carried on and:

(i)  because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii)  there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerns, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year.

Note: This discretion is intended to cover a business activity that has a lead time between the commencement of the activity and production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

That is, due to the nature of some business activities, they will not produce assessable income in the early years and therefore will not be able to produce a profit. However, the nature of cryptocurrency activity is that it is possible to derive assessable income from the first day.

There is nothing inherent in the nature of cryptocurrency trading activity that would prevent you from making a profit from the start. It is considered that the fact that your activity did not produce a profit in the stated income year is not simply a result of the nature of the activity.

2.Special circumstances

The special circumstances discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control.

'Special circumstances' are those circumstances which are sufficiently unusual or different to distinguish them from the circumstances that occur in the normal course of conducting a business activity.

The following has been extracted from paragraphs 47 to 53 of TR 2007/6 in relation to special circumstances:

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997 refers to special circumstances outside the control of the business activity, including drought, flood, bushfire, or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity.

Ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry.

The existence of a volatile market and the associated fluctuations are expected to occur on a regular or recurrent basis when carrying on a cryptocurrency trading business. Such ordinary economic and market fluctuations are not regarded as special circumstances under paragraph 35-55(1)(a) of the ITAA 1997.

In your circumstances, the Commissioner would not exercise his discretion to include any losses from the trading in the calculation of your taxable income for the stated income year. You were new to cryptocurrency trading in the stated income year and developing your trading knowledge. The business decisions you made utilising your trading strategy have contributed towards the tax loss you have incurred. Further, market fluctuations and economic conditions are considered as normal for cryptocurrency traders. Therefore, your business decisions and market conditions are not considered outside your control. The losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997. That is, the losses from your cryptocurrency trading cannot be used against your other income in the stated income year but will be carried forward to be offset in later years when there is a profit from your cryptocurrency trading activity or if you meet the requirements in Division 35 to be able to claim the deferred losses in a later year.