Edited version of private advice

Authorisation Number: 1051961953605

Date of advice: 29 April 2022

Ruling

Subject: CGT - lending Ethereum (cryptocurrency) to a partnership

Question

Will Capital Gains Tax (CGT) event A1 happen when you loan your Ethereum tokens (Ether) to an associated business partnership?

Answer

No, CGT event A1 will not happen when you loan your Ether to an associated business partnership.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You own a number of Ethereum tokens (Ether).

You intend to loan your Ether to entity A, an associated business partnership (Partnership), whereby the Ether are to be transferred from your personal Ethereum wallet to the wallet of the Partnership for the purpose staking on the Ethereum blockchain.

The Ethereum wallets do not have registration details to identify its owner.

You and Person A (your spouse) are partners in the Partnership.

The draft loan agreement (Loan Agreement) between you and the Partnership states, inter alia, the following:

•         You agree to loan entity A an amount of Ether for the purpose of staking the Ether on the Ethereum blockchain.

•         The Ether are not to be sold and remain your property.

•         The initial term of the loan is 12 months and can be extended as negotiated by the parties.

•         The 12 months period will begin as of the signing date, with 1 week allowed for the transfer of te the Ether to the Multistake wallet address to allow and security and transfer costs.

•         You are to receive XX Ethereum per annum in interest and can be paid in ether and/or AUD at the discretion of Multistake.

•         Any profit or loss derived from staking the Ether while on loan will be the profit or loss of Multistake.

There are fees or 'gas price' associated with the transfer of Ether between wallets. Under the Loan Agreement, the lender would be liable for the fees to transfer the Ether to the Multistake wallet and Multistake would be liable for the fees to transfer the interest and borrowed Ether back to the owner.

Relevant legislative provisions

Income Tax Assessment Act Section 102-20

Income Tax Assessment Act Section 104-10

Assumptions

You will continue have ownership of the Ether which include having full access and control of the Ether once they are transferred to the Partnership Ethereum wallet.

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset. All assets acquired since CGT started (20 September 1985) are subject to CGT unless specifically excluded. The Ether are considered CGT assets. Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. A CGT event A1 happens if there is a disposal of a CGT asset. Subsection 104-10(2) defines a disposal as:

You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

When considering the disposal of an interest in an asset, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the asset.

Partnership assets

Under general law in relation to partnerships, a partnership is not a separate legal entity distinct from the individual partners who comprise the partnership. Accordingly, the partnership does not own property in its own right; title to the partnership assets is legally vested in the partners, even though an individual partner may have no separate title to specific partnership assets. This view accords with the opinion expressed by the majority (Barwick CJ., Stephen, Mason and Wilson JJ.) of the Full High Court of Australia in F.C.T. v. Everett (1980) 143 CLR 440 at page 446:

"Although a partner has no title to specific property owned by the partnership, he has a beneficial interest in the partnership assets, indeed in each and every asset of the partnership."

Taxation Ruling IT 2540 Income tax: capital gains: application to disposals of partnership assets and partnership interests (IT 2540) discusses the operation of the capital gains and losses provisions in relation to partnerships.

Para 3 of IT 2540 provides that the agreement between the partners may vary the terms by which legal ownership of the partnership assets is allocated between partners, for example, an individual partner may be the owner of all the partnership assets to the exclusion of other partners whose entitlement relates only to the income of the partnership. However, that position is merely a corollary of the general principle that ownership of the partnership assets is not vested in the partnership itself.

In your case, you propose to loan the Ether to the Partnership for the purpose of staking and receiving interest income. The interest income is to be distributed equally between the partners of the Partnership. It is stipulated in the draft Loan Agreement that the Ether are not be sold and remain your property. In this regard, you as an individual partner, will retain ownership of the Ether to the exclusion of the other partner, whose entitlement relates only to the income of the Partnership. As a result, there will be no change in ownership of the Ether when they are loaned/transferred to the Partnership. As there is no change in ownership of the Ether token, there is no disposal of the asset at the time you loan the Ether to the Partnership. Accordingly, CGT event A1 will not happen.