Edited version of private advice

Authorisation Number: 1051957252991

Date of advice: 27 September 2022

Ruling

Subject: Assessable income crypto assets

Question 1

Are the crypto assets received as a prize for participating in a contest regarded as assessable income?

Answer

No

Question 2

Are crypto assets received from staking considered derived under subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) when it can be withdrawn, and has beneficial use to you?

Answer

Yes

Question 3

Are crypto assets received as payment from providing services considered derived under subsection 6-5(4) of the ITAA 1997 when it can be withdrawn, and has beneficial use to you?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You participated in a contest where submissions were reviewed by a panel of independent judges and winners received crypto assets as prizes.

You were awarded a prize in two competitions.

Under the terms and conditions for payment of your prizes, the crypto assets would be transferred to a crypto wallet solely controlled by you in instalments over a 12-month period.

The terms and conditions of payment included a restriction clause which prevented you from selling, transferring, or licensing to a third party, spending, exchanging, or otherwise making use of the crypto assets during the use restriction period of 12 months. However, staking the crypto assets was not considered a violation of this restriction.

You set up two nodes on a crypto network using a third-party node operator and the crypto network's software, and then staked the crypto assets you won through the contest as collateral in each node.

You received staking rewards in the form of crypto assets from your nodes. You cannot withdraw staked tokens and rewards from a node unless certain conditions are met.

Using your personal skills and experience, you completed programming services for an unrelated party. You were paid crypto assets, for providing these services. These payments were made to your node. There was a restriction clause on this payment which prevented you from withdrawing the crypto assets until certain conditions were met, the crypto assets were paid into your node as collateral and locked until a certain date.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Reasons for decision

Question 1

Summary

The prize received by you for competing in the competition does not constitute either ordinary or statutory income, it is not assessable income under either section 6-5 or section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

A prize or gift will be assessable income if it is:

•         income in the ordinary sense of the word (ordinary income); or

•         an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income).

Under subsection 6-5(1) of the ITAA 1997 an amount is assessable income if it is income according to ordinary concepts (ordinary income).

Generally, a gift or prize is regarded as a personal windfall gain and not as ordinary income unless the taxpayer has received the prize or gift because of, in respect of, or in relation to any income-producing activity of the taxpayer.

In determining whether a prize or gift is ordinary income, the courts have established that consideration of the whole of the circumstances is necessary and that the following factors need to be taken into account:

•         how, in what capacity, and for what reason the recipient received the prize or gift (Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570, (1953) 5 AITR 496; (1953) 10 ATD 126 (Squatting Investment Case))

•         whether the prize or gift is of a kind which is a common incident of the recipient's calling or occupation (Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 10 AITR 367; (1966) 14 ATD 286 (Scott's Case))

•         whether the prize or gift is made voluntarily

•         whether the prize or gift is solicited (Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 6 AITR 248; (1956) 11 ATD 68 (Hayes' Case) and Scott's Case)

•         whether the prize or gift can be traced to gratitude engendered by some service rendered by the recipient to the prize of gift donor (Squatting Investment Case)

•         the motive of the prize or gift donor (though this factor is rarely decisive in itself) (Hayes' Case); and

•         whether the recipient relies on the prize or gift for regular maintenance of themselves and any dependants (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; (1952) 10 ATD 82 (Dixon's Case) and FC of T v. Blake (1984) 75 FLR 315; (1984) 15 ATR 1006; 84 ATC 4661).

Taxation Ruling IT 2145 Income tax: BHP awards for the pursuit of excellence - whether assessable income deals with the question of the 'BHP Awards for the Pursuit of Excellence' (BHP Awards). These BHP Awards are made to Australians who have made outstanding contributions to the pursuit of excellence in their particular fields. IT 2145 provides that although these awards will sometimes be made with regard to achievements directly related to a winner's vocation the nature of the award is that of a personal windfall or gain not having the qualities of income.

The taxpayer's prize winning research was undertaken during the course of their employment as a researcher. In addition to any employer use of the research, the research was published in various scientific journals and discussed at conferences. The publication and discussion of the research was in addition and separate to any employment obligations/responsibilities. It was the dissemination of the research through the mediums of journals and conferences that gave rise to the nomination for the prize.

When the above factors are applied to the conditions under which the prize was awarded and the taxpayer's individual circumstances, the prize money does not take on the character of ordinary income as receipt of the prize is one step removed from the taxpayer's employment. That is, it was not received because of or in relation to their duties as an employee.

In particular:

•         the prize is not a common incident of the taxpayer's occupation

•         it was made voluntarily by the prize giver

•         the prize was not solicited (by the taxpayer)

•         it cannot be traced to any services rendered to the prize giver

•         the motive of the prize giver was altruistic; and

•         the taxpayer does rely on the prize money for general living expenses.

Furthermore, the taxpayer's circumstances can be distinguished from those court or tribunal decisions where prize money has been considered to constitute ordinary income. In Case V6 88 ATC 140; (1987) 19 ATR 3044 a partner in a newsagency business won a prize in a newspaper sales competition. The Administrative Appeals Tribunal held that the taxpayer was in the newspaper business and the prize was attracted as a result of that business activity and therefore the taxpayer received the prize because of, or in relation to the business or income-producing activity.

In Kelly v. FC of T (1985) 80 FLR 155; (1985)16 ATR 478; 85 ATC 4283 an employee footballer won a cash award for being the best and fairest player. The court held that the prize was clearly incidental to the taxpayer's employment as a footballer and that he was eligible to receive the payment by virtue of that employment. This sort of prize was a normal incident of that employment.

The circumstances outlined in the above cases can be contrasted with yours, as you are not carrying on a business, nor was the prize in relation to your employment or a normal incident of your employment. The prize arose out of participation in the competition and is not attributable to your employment in any way.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 of the ITAA 1997 lists those provisions about assessable income. None of the sections listed relate to your prize from the competition.

As the prize received by you does not constitute either ordinary or statutory income, it is not assessable income under either section 6-5 or section 6-10 of the ITAA 1997.

Questions 2 and 3

Summary

Crypto assets received from staking or providing services will constitute income according to ordinary concepts at the time when you can withdraw and have beneficial use of the crypto asset received.

You will have also acquired a CGT asset when you can withdraw and have beneficial use of the crypto asset received. The cost base will be the market value of the crypto asset at the time you acquire the asset.

Detailed reasoning

Subsection 6-5(1) of the ITAA 1997 states that 'your assessable income includes income according to ordinary concepts, which is called ordinary income'.

Subsection 6-5(2) of the ITAA 1997 further states that 'if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year'.

Subsection 6-5(4) of the ITAA 1997 clarifies that 'in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct'.

Chapter 4 of the Explanatory Memorandum to the Income Tax Assessment Act 1997 provides that amounts received still need to have all the attributes of ordinary or statutory income before it is treated as such. You still need to have 'derived' the income.

Ordinary income has generally been held to include three categories: namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

(a)  are earned

(b)  are expected

(c)   are relied upon, and

(d)  have an element of periodicity, recurrence or regularity.

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? provides that bitcoin and other cryptocurrency with similar characteristics to bitcoin, is a CGT asset as opposed to cash or currency, therefore section 21 of the Income Tax Assessment Act 1936 will apply such that a taxpayer will be assessable on the money value of any cryptocurrency received. KEEP tokens and ETH are CGT assets because the holding rights in relation to those tokens are definable, identifiable by third parties, capable of assumption by third parties and have an element of stability.

Where a service has been provided and cryptocurrency is received in consideration for providing the service, the receipt will be assessable as ordinary income under section 6-5 of the ITAA 1997.

In order to have derived the receipt for the proposes of section 6-5, the receipt must have 'come home' to the taxpayer (Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108, 154-5).

Where funds are locked to a cryptocurrency wallet or inaccessible to you until a condition of release is met, the funds will not be derived until the condition of release is met and the funds are accessible.

You received crypto assets as a prize in the competition, you staked these crypto assets as collateral in your nodes. You cannot withdraw the crypto assets while they are being used as collateral. You earn further crypto assets by having crypto assets staked to the node. The earnt crypto assets are locked to the node until you withdraw them to a wallet.

The earnt crypto assets will not be considered derived as income by you until you can withdraw them from the node and will therefore not be assessable until they can be withdrawn and have beneficial use to you.

You also were paid with crypto assets for providing services to an unrelated third-party. The agreement had a condition of release. Similarly, the crypto assets are considered income when they can be withdrawn from the node and have beneficial use to you.