Edited version of private advice

Authorisation Number: 1052132552326

Date of advice: 3 July 2023

Ruling

Subject: Cryptocurrency

Issues

Question 1

Are the gains made from the Taxpayer's trading activities conducted on the X exchange platform in the income years ending 30 June XXXX, 30 June XXXX and 30 June XXXX assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are the losses made from the Taxpayer's trading activities conducted on the X exchange platform in the income years ending 30 June XXXX, 30 June XXXX and 30 June XXXX deductible under section 8-1 of the ITAA 1997?

Answer

Yes

Question 3

Are the losses made from the Taxpayer's trading activities conducted on the X exchange platform in the income years ending 30 June XXXX, 30 June XXXX and 30 June XXXX subject to the non-commercial loss provisions in Division 35 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

The Taxpayer has a full time job working approximately 37.5 hours per week.

The Taxpayer does not have any financial qualifications and has not undertaken any professional training courses in relation to buying and selling equities, stocks, futures, options, contracts for difference or cryptocurrencies.

In XXXX, the Taxpayer commenced buying and selling (trading) cryptocurrencies with a view to earning additional income by taking advantage of the global surge in value and popularity of cryptocurrencies - the Taxpayer did not buy or sell derivatives during the period. The activity lasted for approximately X months.

The cryptocurrency trading activities were undertaken in addition to the Taxpayer's full time occupational hours and ranged between no activity and 21 hours a week. When activities were undertaken, the typical activities included:

•                     Reading and participating in Forum discussions on the topic on Discord and Twitter.

•                     Placing orders for various cryptocurrencies through the trading platform X" noting positions were held for as short as 5 minutes up to a number of weeks.

•                     Following global financial and cryptocurrency trends.

The X trading platform provides its users with the ability to trade a significant number of cryptocurrencies as well as non fungible tokens and the ability to trade an extensive variety of derivative products. It facilitates the trading of derivatives across a range of crypto derivatives including futures and options across a multitude of cryptocurrencies.

The Taxpayer had XXXX transactions over the period they were engaged in the activity.

There was an inconsistent and sporadic approach to the buying and selling transactions with some days and weeks having no activity.

The Taxpayer did not have a business plan or strategy for trading cryptocurrencies prior to or during the above period.

The Taxpayer did not have business premises to conduct the activities from, no trading licences were held, or business names registered.

The Taxpayer did not employ any staff or consultants or contractors to assist in the cryptocurrency trading activities.

The Taxpayer funded the transactions for the cryptocurrency trading activities via personal funds.

The Taxpayer relied on the default reports generated by the X trading platform as a means to keeping records of the transactions undertaken, however, the Taxpayer did not maintain an independent profit and loss or trading report.

The Taxpayer did not have an algorithm, software (outside of the X trading platform) or similar automated system to assist in the identification of potential transactions and was as such unsophisticated.

The Taxpayer did not engage in any formal education, certifications or any type of training in relation to transacting in cryptocurrency outside of the basic tutorials provided by the X platform.

The Taxpayer did not utilise a professional stockbroker, trader or financial planner to either conduct the transactions or to provide guidance and feedback on the transactions undertaken or to plan strategy.

The Taxpayer did not specialise in transacting in a particular class of cryptocurrency and as such traded in a variety of cryptocurrencies.

Due to the nature of the transactions the Taxpayer was exposed to foreign currency risks which were not hedged. The Taxpayer had no strategy to mitigate such risks.

The Taxpayer made profits and losses across the cryptocurrencies acquired.

The Taxpayer no longer holds any cryptocurrency.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

Question 1

Summary

The gains made on the X exchange platform are assessable income under section 6-5 of the ITAA 1997, but not from carrying on a business.

Detailed reasoning

Subsection 6-1(1) of the ITAA 1997 states that assessable income consists of both ordinary income and statutory income.

Subsection 6-5(1) defines ordinary income as income according to ordinary concepts and ordinary income has generally been held to include three categories: income from rendering personal services, income from property and income from carrying on a business.

Carrying on a business

Taxation Ruling TR 97/11 Am I Carrying on a Business of Primary Production (TR 97/11) discusses the relevant indicators to consider in determining whether a taxpayer's activities amount to carrying on a primary production business and, as confirmed in ATO ID 2010/56 Income Tax Assessable income: derivation of income - spread betting (ATO ID 2010/56), these indicators are equally relevant when determining whether a taxpayer is carrying on a business generally. TR 97/11 lists the following indicators as having emerged from case law as relevant:

•                     Whether the activity has a significant commercial purpose or character

•                     Whether the taxpayer has more than just an intention to engage in business

•                     Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•                     Whether there is repetition and regularity of the activity

•                     Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

•                     Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

•                     The size, scale and permanency of the activity

•                     Whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Whether there is a business being carried on is a question of fact and involves an inquiry into matters such as whether the transactions are entered into in a systematic, organised and 'businesslike' way; the repetition or regularity of the transactions; the scale of the transactions; whether the transactions are related to, or part of, other activities of a businesslike character; the purpose of the taxpayer; the degree of skill employed in how the taxpayer engages in the transactions.

Business operation or commercial transaction entered into with the intention or purpose of making a profit

Where the activities do not constitute the carrying on of a business, the gains made the transaction may still be assessable as ordinary income under section 6-5 of the ITAA 1997 if the profits were obtained in a business operation or commercial transaction entered into with the intention or purpose of making a profit.

Profit or gain arising from an isolated business or commercial transaction will generally be ordinary income if the taxpayer's purpose in entering into the transaction was to make a profit.

Taxation Ruling TR 92/3: Income tax: Whether Profits on Isolated Transactions Are Income (TR 92/3) confirms:

16. If a taxpayer not carrying on a business makes a profit, that profit is income if:

(a)          the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

(b)          the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

In ATO ID 2010/56, the Commissioner confirms that the principle applies in the context of multiple transactions:

Even if the activities do not constitute the carrying on of a business of spread betting, the gains made on each individual contract may still be assessable as ordinary income under section 6-5 of the ITAA 1997 if the profits were obtained in a business operation or commercial transaction entered into with the intention or purpose of making a profit (see Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199; 18 ATR 693; 87 ATC 4363 and Income Taxation Ruling TR 92/3: 'Income tax: Whether Profits on Isolated Transactions Are Income').

In 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? the Commissioner confirms the principles that are relevant in determining whether the gain from the disposal of a CGT asset is assessable as ordinary income, having regard to the taxpayer's profit-making intention, and the operation of section 118-20 of the ITAA 1997 in these circumstances to reduce any capital gain made by a taxpayer by an amount that is included in the taxpayer's assessable income under another provision of the tax law:

Gains instead assessable as ordinary income?

22. 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.

23. Factors considered relevant to determining whether an isolated transaction amounts to a commercial transaction are listed at paragraph 49 of TR 92/3. Applying these factors to a Bitcoin scenario, of particular relevance, is the amount of money involved in the mining (or acquisition) and disposal of the bitcoin, the magnitude of the profit sought or obtained, the length of time the bitcoin is held before disposal and whether that bitcoin has no other immediate use other than as an object of trade.

24. Accordingly, for example, where a taxpayer mines a small amount of bitcoin as a hobby and after two years decides to sell the bitcoin for a small profit in order to purchase a more stable investment item, the gain will be assessed under the CGT provisions, not as ordinary income. Further, as the bitcoin were used to purchase an investment, the capital gain will not be disregarded under subsection 118-10(3) because the bitcoin will not be personal use assets.

25. If, on the other hand, a taxpayer acquires bitcoin with the purpose of profiting from it upon a commercial transfer, a gain made on its disposal will be assessable under section 6-5 and any capital gain arising under CGT event A1 will be correspondingly reduced under section 118-20.

The nature of cryptocurrencies

TD 2014/26 explains that bitcoin is a CGT asset.

The principles in this determination are not limited to bitcoin and apply to other cryptocurrencies.

Application in these circumstances

The Taxpayer invested significantly in their trading activities and made gains and losses over numerous trades.

In weighing up the relevant factors it is considered that the Taxpayer was not carrying on a business in cryptocurrency trading in the relevant income year. Notwithstanding, the overall size of the transactions and high volume of activity does not lead to the conclusion that the Taxpayer was carrying on a business of cryptocurrency trading having regard to their expertise and the manner in which they conducted their cryptocurrency trading activities (including their trading strategy).

Considering these factors and the speculative nature of cryptocurrency trading, the Taxpayer was not carrying on a business of cryptocurrency trading - the Taxpayer's activities align with commercial trading activities with a profit-making purpose. This conclusion is supported by the views taken in TR 92/3 and ATOID 2010/56.

In this case, it is considered that the Taxpayer's intention in entering into the transactions on the X trading platform was to make a profit or gain- the Taxpayer's trading pattern does not reflect the intent to hold the cryptocurrencies for the long term to make capital gains in the future. Given the amount of money involved in the transactions, the magnitude of the transactions it is accepted that the transactions were entered into in the course of carrying out commercial transactions.

The Taxpayer's cryptocurrency trading activities had a profit-making intention (this was an investment activity whereby they intended to make a profit). The Taxpayer commenced the activities with the intention to make a profit. Multiple trades were made with significant money at risk and profits were made before the losses were ultimately incurred.

As such, the gains made from the Taxpayer's trading activities are assessable as ordinary income under section 6-5 of the ITAA 1997 - any capital gain arising under CGT event A1 with respect to the disposal of the cryptocurrency will be correspondingly reduced under section 118-20 of the ITAA 1997 by an amount that is included in the Taxpayer's assessable income under sections 6-5 of the ITAA 1997 (noting that section 15-15 of the ITAA 1997 does not apply in these circumstances).

For completeness we note that it is not considered that the Taxpayer's cryptocurrency trading activities were entered into for the purpose of recreation by gambling.

Question 2

Summary

The losses made on the X exchange platform are deductible under section 8-1 of the ITAA 1997 where, had a gain been made, it would have been assessable under 6-5 of the ITAA 1997.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductable (TR 92/4) 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 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. As discussed above, 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.

In this case, it is considered that the Taxpayer's intention in entering into the transactions was to make a profit or gain and the transactions were entered into, and the losses was made, in the course of carrying out commercial transactions, so the loss is deductible under section 8-1 of the ITAA 1997 (noting that section 25-40 of the ITAA 1997 does not apply in these circumstances).

Question 3

Summary

The non-commercial loss provision in Division 35 of the ITAA 1997 have no application in relation to the Taxpayer's circumstances as they were not carrying on a business of cryptocurrency trading.

Detailed reasoning

A non-commercial business activity is a business activity where the expenses in the year exceed income.

Division 35 of the ITAA 1997 prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year that the loss is incurred. The loss is deferred.

Division 35 of the ITAA 1997 sets out a series of tests to determine whether a business activity is treated as being non-commercial.

The deferred losses may be offset in later years against profits from the activity, or if one of the tests is satisfied or the Commissioner exercises a discretion, against other income. Division 35 of the ITAA 1997 only applies to losses from business activities.

As concluded in Question 1, the Taxpayer was not carrying on a business of cryptocurrency trading during in the income years ending 30 June 2021, 30 June 2022 and 30 June 2023. As the Taxpayer was not carrying on a business the non-commercial loss provisions in Division 35 of the ITAA 1997 have no application in these circumstances.