Edited version of private advice

Authorisation Number: 1052030474609

Date of advice: 27 September 2022

Ruling

Subject: Cryptocurrency - isolated transaction

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the loss incurred from your cryptocurrency investments through a scam agent?

Answer

Yes

This private ruling applies for the following period:

Year ended 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

Your spouse passed away and left you an estate to manage.

You have since tried to manage this estate responsibly so that you can pass it on to your children.

You started investing in different cryptocurrencies via several exchanges in order to make a profit.

Initial investment

In 2021, you received an email stating that you could double your investment if you acquired Bitcoin (BTC).

You subsequently created an account on the link provided and made an initial investment to acquire BTC.

The following day, you received an email from an individual (the agent) who claimed to be a personal advisor from a finance service provider.

The agent requested you send your driver's license and a photo via WhatsApp for client verification.

You invested a further investment in BTC via the agent.

The agent subsequently opened a separate account in your name on different digital exchanges.

You were told by the agent that you had made a profit on your initial investment.

The agent provided you with a Cryptocurrency investment plan (the Plan).

You decided to invest in the Plan with the intention of making significant profits and increasing your assets and the value of the estate you would ultimately pass on to your children and grandchildren.

You intended to fund the investments from the sale proceeds arising from the disposal of your share portfolio.

Accordingly, you sold your shares in your share portfolio to fund the investments.

You continued to sell your ASX shares to invest as you believed you were making profits from these investments.

Loss on investments made via digital exchange X

The agent opened an account on your behalf on exchange X.

You transferred a large amount of money from your Australian bank account to the exchange X account set up by the agent.

The exchange X has two running accounts.

These comprise a 'Cash Account' into which the AUD is deposited by you, and an 'Everyday Bitcoin Account' which holds the BTC acquired in a separate account.

Essentially, the AUD funds deposited in the Cash Account were transferred immediately to the Everyday Bitcoin Account and applied to purchase BTC, and part of the balance of the BTC was promptly transferred to a third-party account held by the agent.

Ultimately all the BTC was transferred to the agent's account, and you incurred significant loss.

It was subsequently determined that the agent's identity was fake as the email was registered in one country whilst the mobile telephone contact number was registered in the other country.

No compensation has been received in respect of the loss and the agent has ceased all communications.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductable considers whether losses on isolated transactions are deductible under section 8-1 of the ITAA 1997. According to Paragraph 1 of TR 92/4, the term 'isolated transactions' refers to:

•                     those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

•                     those transactions entered into by non-business taxpayers.

Paragraph 4 of TR 92/4 states that a loss from an isolated transaction is generally deductible under section 8-1 if:

a)            in entering into the transaction the taxpayer intended or expected to derive a profit which would have been assessable income; and

b)            the transaction was entered into, and the loss was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Paragraph 22 of the 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?states that whether a gain on the disposal of bitcoin that are not personal use assets is included in a taxpayer's assessable income as a capital gain or as ordinary income will depend on all the facts and circumstances of the case. In the case of an isolated transaction that is not carried out as part of a business operation, the Commissioner considers that a gain will generally be ordinary income where the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and the transaction was entered into in carrying out a commercial transaction.

Paragraph 15 of TR 92/4 refers to Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income for fuller explanation of the ATO views on the elements of a business operation or commercial transaction. Paragraph 13 of TR 92/3 sets out various matters relevant in considering whether a transaction amounts to a commercial transaction. These include, among other things:

•                     the amount of money involved in the transaction

•                     the magnitude of the profit sought

•                     the manner in which the operation was entered into

•                     the nature of any property acquired and disposed of

•                     the timing of the transaction or the various steps of the transaction

Some misappropriation losses may satisfy one or other of the criteria of section 8-1 and be deductible. If a misappropriation loss has been incurred 'in the course of' an activity that forms part of the conduct involved in 'gaining or producing assessable income' it is available as a general deduction: Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 at 349-350.

In the matter of Case V24 (1988) 19 ATR 3117, no deduction was allowed for funds which were misappropriated by a solicitor. The taxpayer had provided money to the solicitor to purchase a quantity of gold bullion. The bullion was supposedly to be immediately on sold for a profit, but the entire proposal was fraudulent. Although the solicitor repaid a substantial part of the stolen money, the taxpayer claimed a deduction for the unrecovered balance. The deduction claim was disallowed on the basis that the money was misappropriated before any gold bullion was purchased and therefore occurred before the profit-making scheme commenced. It therefore could not qualify as a deductible loss incurred in gaining or producing assessable income.

In the matter of Lean v FC of T [2010] 75 ATR 213, no deduction was allowed for funds which were misappropriated by a securities trader. The taxpayer had provided money to the trader for a wide range of possible investment activities. In making their decision, the Full Federal Court only considered whether a deduction was allowable under section 25-45 of the ITAA 1997. However, the AAT had previously considered whether, in the alternative, the deduction was allowable under section 8-1 of the ITAA 1997. The deduction claim was disallowed on the basis that the misappropriated money was capital and could not, therefore, qualify as a deductible loss necessarily incurred in carrying on a business.

In your case, it is considered that your intention in entering into the transactions to invest in the Plan was to make a profit or gain. Given the amount of money involved in the transactions, the magnitude of profit sought and the existence of an investment plan it is accepted that the transactions were entered into in the course of carrying out commercial transactions. Your case can be distinguished from Case V24 as the assets that formed part of the investment plan were purchased before the misappropriation. It can also be distinguished from Lean v FC of T as it occurred in the course of undertaking a profit-making venture, and not as a capital investment. Therefore the loss is deductible under section 8-1 of the ITAA 1997.