Edited version of private advice

Authorisation Number: 1052089379537

NOTICE

This private ruling was revised following an issue. This edited version has therefore been replaced with the edited version of the private ruling with the authorisation number of 1052192526297.

Date of advice: 28 February 2023

Ruling

Subject: Cryptocurrency - disposal and acquisition

Question 1

Is the sacrifice of your cryptocurrency assets a CGT event A1 according to section 104-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the acquisition of cryptocurrency assets from staking be ordinary income under section 6-5 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In the 20XX Income year you participated in the cryptocurrency sacrifices for cryptocurrency A chain, cryptocurrency X and the Liquid loans Protocol. These projects have not yet launched. It is not known when or if the projects will launch.

You sacrificed your cryptocurrency to a public address that is not under your control. Upon sacrifice of your cryptocurrency, you received sacrifice points. This sacrifice was made to and was able to be tracked.

This was in order to support a political statement issued by the protocol's controlling entity.

When cryptocurrency chain is launched, you may receive an airdrop of cryptocurrency A and cryptocurrency X coin.

The amount of Cryptocurrency A or Cryptocurrency X you will receive per the sacrifice points you have obtained is calculated at a 1:1 ratio.

It was stated at the time of the sacrifice events that the sacrifice points have no monetary value and that there is no guarantee you will receive anything in return for them.

You made to following sacrifices:

•         XX XX 20XX you sacrificed US$X,XXX of cryptocurrency coins to the Liquid Loans protocol. You received XX,XXX,XX.XX sacrifice points and on launch you will be airdropped a corresponding number of loan tokens.

•         XX XX 20XX you sacrificed US$XXX.XX value or 0.XX of cryptocurrency to the cryptocurrency A chain project. You received XXX,XXX.XX sacrifice points and on launch you will be airdropped a corresponding number of Cryptocurrency A tokens.

•         X XX 20XX you sacrificed US$X,XXX.XX of cryptocurrency coins to the cryptocurrency X project. You received XX,XXX,XXX.XX sacrifice points and on launch you will be airdropped a corresponding number of cryptocurrency X tokens.

•         X XX 20XX you sacrificed $X,XXX of cryptocurrency coins to the cryptocurrency X project. You received XX,XXX,XXX.XX sacrifice points and on launch you will be airdropped a corresponding number of Cryptocurrency X tokens.

You have also invested and staked Cryptocurrency C tokens into the Cryptocurrency C project.

The C project you have invested in and sacrificed to has the following attributes:

•         The cryptocurrency C yield is not derived from a consensus mechanism network (where the blocks are validated by consensus, rather, its form Decentralised Finance (De-Fi) staking.

•         When the staked Cryptocurrency C within the contract the user agrees to time lock their Cryptocurrency C for a given period of time in return for yield. Although, the staking process is unique in relation to most De-Fi staking protocols.

•         When the staked Cryptocurrency C tokens are sacrificed the contract burns (permanently removes these tokens from circulation) the original Cryptocurrency C tokens and in return the user receives sacrifice shares within the protocol.

•         When staking, the user agrees to lock up their tokens between X and XXXX days.

•         When the stake matures the user ends the stake and mints Crypto C tokens. This function transforms your sacrifice shares into new cryptocurrency C tokens. The tokens received comprise of your principal and yield/rewards. Therefore, the sacrifice shares accrue value, the tokens received from yield/rewards is derived from the number of sacrifice shares held, length of stake and penalties paid out.

•         The cryptocurrency C yield is not derived from consensus mechanism network (where the blocks are validated by consensus, rather it's from Decentralised Finance (DE-Fi) staking.

•         The rewards received are a result of inflation (X.XX%pa) & penalties (individuals end staking before their time lock expires) paid.

•         The exact yield received is not known until the user preforms the end stake function, at that point the protocol will calculate the total yield due.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 21

Income Tax Assessment Act 1997 section 6-5

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 Cryptocurrency

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 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 and X tokens, the 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 and X 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.

Cryptocurrency- C rewards

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 ITAA 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.

Where a service has been provided and cryptocurrency-C 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-C 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.