Edited version of private advice

Authorisation Number: 1052129517448

Date of advice: 21 June 2023

Ruling

Subject: Cryptocurrency

Question 1

Is the disposal of your cryptocurrency a CGT event A1 under section 104-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are the rewards from your cryptocurrency ordinary income under 6-5 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 202X

The scheme commences on

1 July 202X

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You made three cryptocurrency deposits to a cryptocurrency platform.

When you transferred your cryptocurrency from your account to the cryptocurrency platform, you no longer had the cryptocurrency in your wallet or had direct access to, or control over it.

Each month, you were expected to receive a reward/interest back into your cryptocurrency account. This amount was added to your total unless you give notice you wanted to withdraw. At that time, you were told you must provide a minimum notice time if you wanted to withdraw.

Any amounts withdrawn, would be in cryptocurrency.

You had no control over where the rewards were held, in what currency or coin other than your reference on the cryptocurrency platform.

You have not withdrawn any rewards amounts from the cryptocurrency platform.

Your secure wallet was restricted after your deposit to the cryptocurrency platform. Your secure wallet provider notified you they had reports of the cryptocurrency platform being a scam and other customers were unable to recover money.

You were advised that due to the cryptocurrency landscape the cryptocurrency platform was locking all accounts and funds and no withdrawals would be possible while they restructured to a new business model.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Reasons for decision

Question 1

Summary

CGT event A1 under section 104-10 of the ITAA 1997 happened when you disposed of your cryptocurrency asset.

Detailed reasoning

Section 102-20 of the 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. Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1, which 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.

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.

When considering the disposal of an interest in a CGT 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.

A transaction involving a disposal of a cryptocurrency asset 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.

In your case, when you transferred your cryptocurrency from your secure wallet to the cryptocurrency platform, you no longer had the cryptocurrency in your wallet or had direct access to, or control over it.

As a result, CGT event A1, under section 104-10 of the ITAA 1997, has happened on the disposal of your cryptocurrency.

Question 2

Summary

Rewards from the cryptocurrency are assessable as ordinary income under section 6-5 of the ITAA 1997, when they are derived.

Detailed reasoning

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 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 states 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.

If the income has characteristics of the four listed above then it can be considered as ordinary income under section 6-5 of the ITAA 1997.

In your case, where your funds, contributed through the disposal of cryptocurrency from your secure wallet account to the cryptocurrency platform, were invested and rewards were received as a return on your investment, the receipt is ordinary income under section 6-5 of the ITAA 1997.

However, where the funds are locked to a trading platform, 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 or can be dealt with in any way, on your behalf, or as you direct.

The case Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108, 154-5, noted in the assessment of income the object is to discover what gains have during the period of account 'come home' to the taxpayer.This establishes that for a receipt of ordinary income to be assessable under section 6-5 of the ITAA 1997 it must 'come home' to the taxpayer.

Although rewards were credited to your account, you were not able to access them, or have them applied or dealt with in any way on your behalf or as you directed. You were notified that your account was locked and that no withdrawals would be possible at all. Until this happens, the funds are not accessible to you and you cannot otherwise deal with them in any way.

Since the rewards have not 'come home' to you they have not yet been derived. The rewards will be assessable as ordinary income under subsection 6-5(4) of the ITAA 1997, as soon as they are applied or can be dealt with in any way, on your behalf or as you direct.