Edited version of private advice

Authorisation Number: 1052012493751

Date of advice: 19 September 2022

Ruling

Subject: Cryptocurrency - disposal and acquisition

Question 1

Does the disposal of the cryptocurrency asset A, via the sacrifice stage, trigger CGT event A1 according to section 104-5 of Income Tax Assessment Act 1997?

Answer

Yes

Question 2

When the CGT event A1 happens, would the capital proceeds received be determined to be nil?

Answer

No

Question 3

If the cryptocurrency B chain is later received through the 'sacrifice' stage because of disposing of the cryptocurrency A, will the cost base be nil?

Answer

Yes

This private ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You held cryptocurrency A which you acquired for long term capital appreciation.

A new project cryptocurrency B chain has been released which you have decided to invest in.

You have invested in the project by disposing of an amount of the cryptocurrency A into the project's origin wallet.

There is no guarantee that you will receive cryptocurrency B as a result of the sacrificing. This is explicitly expressed by the projects founder.

The process of acquiring cryptocurrency B via the project wallet is as follows:

•                     interested parties were required to send to origin wallet address an amount of cryptocurrency A which they wished to pay for a 'chance' to receive the new cryptocurrency B.

•                     when the cryptocurrency B is released along with the project, the founders will then provide cryptocurrency B in a 1:1 ratio for the cryptocurrency B deposited into the origin wallet address.

The founders called this process 'sacrificing'. The process of sacrificing does not entitle the investor to acquire cryptocurrency B but receives the chance to do so.

The founder of the cryptocurrency B chain project has emphasized this is done strictly to allow investors to 'donate' to the projects funding as opposed to selling their cryptocurrency A to acquire Cryptocurrency B.

The project is not guaranteed to be released.

Cryptocurrency B have not yet been released and are not available for acquisition.

This will be stored on the blockchain. As cryptocurrency B is a hard fork of the ETH network, it is in development and is currently a 'Test net'.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 103-10

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 116-30

Reasons for decision

Surrendering the A Tokens

If there is a CGT event, you may make either a capital gain or capital loss on the disposal of the crypto asset. If you make a capital gain, you may pay tax on it.

A transaction involving a disposal takes place when you do any of the following:

•                     sell a crypto asset

•                     gift a crypto asset

•                     trade, exchange or swap a crypto asset for another crypto asset

•                     convert a crypto asset to Australian or foreign currency (otherwise known as 'fiat currency')

•                     buy goods or services with a crypto asset.

Subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states, that CGT event A1 happens if you dispose of a CGT asset and according to subsection 104-10(2) of the ITAA 1997, 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.

When you send your 'A' tokens to the relevant wallet, the most appropriate CGT event would be A1 based on the facts. You are taken to have disposed of your assets to another entity.

Capital proceeds

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.

According to subsection 116-20(1) of the ITAA 1997 the capital proceeds from a CGT event are the total of the money received or are entitled to receive in respect of the event happening; and the market value of any other property received, or are entitled to receive, in respect of the CGT event happening (worked out as at the time of the event).

Capital proceeds - Market Value Substitution Rule

Section 116-30 of the ITAA 1997 operates so that you are taken to have received the market value of the CGT asset in certain situations.

On the sacrificing of the A tokens, the A token owner is taken to have received the market value if:

a) no capital proceeds are received for the surrender, or

b) some or all of the capital proceeds from a CGT event cannot be valued; or

c) the capital proceeds are more or less than the market value of the asset and the parties engaged in a non-arm's length dealing in connection with the CGT event.

The market value substitution rule would likely apply to the disposal of the A tokens when sacrificed as you would be taken to receive no capital proceeds upon surrender of the assets. Therefore, you would be taken to have received the market value of the CGT asset you disposed of, being the A tokens, at the time it was surrendered. This may mean you have a capital gain or loss.

Receipt of 'B' tokens

Subparagraph 103-10(2)(b)(i) of the ITAA 1997 deals with the scenario where proceeds of a transaction are received as part of deferred capital proceeds at a later date. However, the scenario indicated and the information publicly available, highlights that there is no entitlement that contributors may receive anything, other than the chance to acquire B tokens as a result of a sacrificing the A tokens. It would be taken you would not have an entitlement to the B tokens at the time of the CGT event. This means the B tokens received would not be treated as capital proceeds from the surrender of the A tokens.

Assuming the B tokens were eventually received, they would be treated as a new separate CGT asset. This would mean the first element of the cost base for the B tokens would be the market value at the time the new asset was acquired. As indicated there would be no existing market for the B tokens when initially received, as the relevant asset has never been traded before. Therefore, they would have no value when acquired, resulting in the first element of the cost base being $0.