Edited version of private advice

Authorisation Number: 1052044328016

Date of advice: 17 October 2022

Ruling

Subject: Commissioner's discretion - crypto trading

Question 1

Will the Commissioner exercise discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your crypto business activity in your calculation of taxable income for the 2020-21 financial year?

Answer

No

Question 2

Will the Commissioner exercise discretion under paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your crypto business activity in your calculation of taxable income for the 2020-21 financial year?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You commenced cryptocurrency trading activity in the 20XX financial year.

You do not satisfy the less than $250,000 income requirement.

The sole purpose of your cryptocurrency trading activity is to realise short term gains from trading.

You spend hours a day monitoring the market.

You have invested a large amount of money into cryptocurrency trading.

Your turnover from cryptocurrency trading is in the millions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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

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

Income Tax Assessment Act 1997 subsection 35-10(4)

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 section 35-35

Income Tax Assessment Act 1997 section 35-40

Income Tax Assessment Act 1997 section 35-45

Income Tax Assessment Act 1997 section 35-55

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

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

Reasons for decision

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) of the ITAA 1997 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. We do not consider that there is anything inherent or innate in the nature of your business activity that it has not yet been able to make a tax profit.

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. Market fluctuations and varying economic conditions are considered a normal risk of being a cryptocurrency trader. Therefore, the Commissioner is unable to exercise the 'lead time' or 'special circumstances' discretion and 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 of the ITAA 1997 to be able to claim the deferred losses in a later year.