Edited version of private advice

Authorisation Number: 1052144901537

Date of advice: 10 August 2023

Ruling

Subject: Share and cryptocurrency trading

Question 1

Is the partnership carrying on a business as a share and cryptocurrency trader for the relevant financial year?

Answer

No.

Question 2

Are the proceeds received from the sale of shares and cryptocurrency assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA1997) for the relevant year?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commenced on:

1 June 20XX

Relevant facts and circumstances

Partner A and Partner B entered into an oral partnership agreement on a specified date to establish a partnership ('The Partnership').

Due to the market volatility during Covid-19, Partner A and Partner B saw an opportunity to make a profit on both the share and cryptocurrency markets.

Each partner verbally agreed to share the profits and losses of the partnership equally on a 50:50 basis.

Partner B opened a share trading account in their name and commenced share trading activities with a view of profit making. Partner B purchased shares for short-term and long-term trades.

The Partnership undertakes spot share trading only. No sales of shares were sold in the relevant year.

Partner A and Partner B opened separate cryptocurrency trading accounts in their respective names and commenced cryptocurrency trading activities during the relevant year, with a view of profit making.

Both partners have access to all investment accounts.

The Partnership trades in cryptocurrency but also invest/stake for rewards. Partner A's account is used for staking for rewards whilst Partner B's account is used for trading. The partners use the floor/ceiling price function to sell/buy cryptocurrency.

Each partner provided different amounts of equity towards the activities. Since the partners entered into an oral partnership agreement in June 2020, the partners made contributions and withdrawals.

Partner B uses most of the amounts withdrawn from the share trading account to contribute to the cryptocurrency account.

Neither partner had previous experience with cryptocurrency trading nor with share trading.

The partners subscribe to the Australian Financial Review and Sydney Morning Herald to keep up to date with investment markets.

The partners gain their knowledge from YouTube influencers, news, and takes advice from friends.

The partners use internet-based communications such as phone calls and text messages to discuss trading decisions and to send key information or links.

Partner B discusses strategies with Partner A including potential companies and/or cryptocurrency to invest. Partner B executes the transactions when Partner A agrees.

Partner B has full time employment. The partner invests three to five hours a day for the following trading activities:

•                     monitor and conducting trades during the ASX market opening time.

•                     read shares and crypto related news.

•                     set buy and sell trades in advance to hedge investments. Any significant movements, she will discuss with Partner A before putting the trades in.

Partner A has full time employment. She spends 1-2 hours per weekday researching and obtaining advice from their friends who are experienced in cryptocurrency market for tips and tricks on trading any potential coins.

Partner A uses their spare time in the evening after working hours and the weekends for the following trading activities:

•                     monitor markets, review trends, prepare and update investment strategies and research new coins.

•                     set buy and sell transactions in their Binance account, set alerts for price movements in shares and coins to stay on top of market movements for Partner B to execute.

•                     review and evaluate investment strategies recommended by Partner B and experienced traders at night.

The volume of cryptocurrency trading transactions under both partner's cryptocurrency account was a specified number of transactions.

Partner B's share trading activities included:

•                     purchase of shares that was held onto for approximately two months prior to selling of the shares.

•                     further shares were purchased two days later that were disposed of four months later.

•                     purchase of shares that were held for several months prior to selling.

The partners realised losses from their respective cryptocurrency trading accounts:

The Partnership made a gross capital gain from the share trading.

A partnership tax return has been lodged.

The Partnership registered an ABN & TFN. The ABN registration was backdated.

The Partnership opened a bank account after seeking professional advice from the newly appointed accountant.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) section 6-5

Income Tax Assessment Act 1997 (ITAA 1997) section 8-1

Income Tax Assessment Act 1997 (ITAA 1997) section 102-5

Income Tax Assessment Act 1997 (ITAA 1997) section 102-10

Reasons for decision

Question 1

Is the partnership carrying on a business as a share and cryptocurrency trader for the relevant financial year?

Answer

No.

Summary

Whether the Partnership is carrying on a business of share and cryptocurrency trading or are a share and cryptocurrency investor is dependent on whether the activities are conducted in a businesslike manner. While some of the activities are business like, the overall conduct does not show that the Partnership is operating as a business. Predominately the Partnership does not operate to the same industry standards as other share trader and cryptocurrency businesses and base most of its trades off speculation as opposed to having a business plan or consistent strategy outlining how the Partnership intends to make a profit.

Detailed reasoning

There are 2 possible scenarios as to how gains and losses from share and cryptocurrency trading activities can be treated for income tax purposes. These scenarios and their consequences are as follows:

1. Business Income

In this scenario your share and cryptocurrency activities would be considered to constitute the carrying on of a business. Your share and cryptocurrency would be regarded as trading stock and any gains or losses would be included in your assessable income. Your income would be ordinary income and assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), while your expense would be deductible under section 8-1 of the ITAA 1997.

2. Investment Income

In this situation your share and cryptocurrency trading activities would be regarded as investing. Your share and cryptocurrency assets are considered capital gains tax (CGT) assets. Any gains resulting from the disposal of shares or cryptocurrency would be income as a capital gain. Any losses sustained on the disposal of your shares or cryptocurrency would be a capital loss. Your income would be statutory income and assessable under section 102-5 of the ITAA 1997, while a loss would be deductible under section 102-10 of the ITAA 1997.

To determine which of these treatments applies to your situation it is necessary to make a determination of whether or not your share and cryptocurrency activities amount to the carrying on of a business.

Carrying on a business

Whether or not a person is carrying on a business is a question of fact and degree and is determined on a year-to-year basis. If a taxpayer's activities do not amount to the carrying on of a business in one income year, that will not prevent them doing so in a later income year.

Similarly, when the extent of an activity falls below what is required for that activity to be commercially viable the activity may no longer constitute the carrying on of a business.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) lists the following indicators as relevant in determining if a business is being carried on:

•                     whether the activity has a significant commercial purpose or character,

•                     whether the taxpayer has more than 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 that is 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 out in a business-like manner,

•                     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.

The following is your application to these indicators:

Whether the activity has a significant commercial purpose or character

The activity of buying and selling shares is a commercial activity, particularly where shares are held in the short term for resale at a profit and no dividends are received. In this case, the partners invested in acquiring shares and cryptocurrency with the intention of making a profit in separate share/cryptocurrency trading accounts.

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

The partners did not have a business plan and merely relied on market analysis to guide their decisions. The partners gain knowledge of the cryptocurrency trading from YouTube influencers, news, and takes advice from friends

Whether the taxpayer has a purpose of profit as well as a prospect of profit

Both partners have a purpose of profit as well as a prospect of profit.

Whether there is repetition and regularity of the activity

You provided evidence of trades that were conducted during financial year in question.

As we have noted, Partner B purchased shares on a number of occasions and sold shares on multiple occasions during the financial year. A number of shares were purchased and held for several months before they were disposed of.

There is a degree of repetition and regularity in your share and cryptocurrency transactions, but not at a level that would indicate that a business of cryptocurrency/share trading was being carried on.

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

Both Partner A and B work full time. In the financial year, the Partnership's transactions were not conducted in a way similar to a trader, and the activities were not carried out in a way similar to carrying on a business as a trader.

Whether the activity is planned, organised and carried out in a business-like manner,

Activities are more likely to amount to carrying on a business where they are carried out in a systematic manner. This usually involves matters such as setting profit targets, budgets, maintaining operations on a consistent basis, keeping appropriate business records, etc.

Partner A spends 1-2 hours per weekday researching and obtaining advice from their friends who are experienced in the cryptocurrency market and obtaining tips from them on trading any potential coins.

Partner B uses their spare time in the evening after working hours and the weekends for the following trading activities:

•                     monitor markets, review trends, prepare and update investment strategies and research new coins.

•                     set buy and sell transactions in their cryptocurrency account, set alerts for price movements in shares and coins to stay on top of market movements.

Partner B discusses strategies including potential companies/cryptos to invest, timing to realise gains with Partner A and once agreed mutually by both partners, Partner B will be the executor of the plan. Any deviation from plan or out of plan movements, Partner B will discuss with Partner A again before making the trades.

Based on the information provided, the activities of the partners do not display the sophistication that may be expected of a share/cryptocurrency trading business. Further, the partners, although having access to the investment accounts, kept separate trading accounts during the relevant year.

The size, scale and permanency of the activity

As noted above, shares were purchased and sold on multiple occasions, however the frequency and the size of the share and cryptocurrency transactions were not significant during the period.

The activities did have some of the characteristics of a business as there were some degree of repetition and regularity. However, the activities lack size, scale and permanency of carrying on the business of a cryptocurrency/share trader.

Whether the activity would be better described as a hobby, recreational or sporting activity

The share trading and cryptocurrency trading activities do not have the nature of a hobby or recreational pursuit.

Conclusion

After weighing up the relevant business indicators and objective facts surrounding this case and based on the information and documentation provided, it is the Commissioner's view that the overall impression is that the Partnership is not carrying on a business of share or cryptocurrency trading in the relevant income year. As a result, for the relevant year, the share and cryptocurrency activities by each partner are indicative of a share and cryptocurrency investor.

Question 2

Are the proceeds received from the sale of shares and cryptocurrency assessable as ordinary income as per section 6-5 of the Income Tax Assessment Act 1997 (ITAA1997) for the year ended 30 June 2021?

Summary

As the Partnership is not carrying on a business activity, any gain or loss from the share trading and cryptocurrency trading activities should be returned on capital account and assessed under the CGT rules in Part 3-1 of the ITAA 1997.

Detailed reasoning

Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

Paragraph 1 of Taxation Determination TD 2014/26 Income tax: is Cryptocurrency a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) (TD 2014/26) states that bitcoin is a CGT asset for the purposes of subsection 108-5(1) of the ITAA 1997. Although this Taxation Determination is about Bitcoin, it also applies to other cryptocurrency assets.

Section 102-20 of the ITAA 1997 states that a capital gain or loss is made only if a CGT event happens. CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997).

The disposal of the shares and cryptocurrency that is not part of a business or commercial transactions will give rise to CGT event A1.

Subsection 104-10(4) of the ITAA 1997 provides that a capital gain will arise if the capital proceeds from the disposal are more than the asset's cost base and a capital loss will arise if the capital proceeds are less than the asset's reduced cost base.

A net capital gain forms part of your assessable income while a net capital loss can only be deducted from a future capital gain. If a capital loss cannot be deducted in a particular year, it can be carried forward to a future year or years until it is able to be deducted.

Application to your circumstances

As the Partnership is not carrying on a business activity, the proceeds from the sale of shares and cryptocurrency are not considered ordinary income under section 6-5 of the ITAA 1997. The gain or loss from the trading activities should be returned on capital account.

Conclusion

The gain or loss from the sale of shares and cryptocurrency should be returned on capital account. Capital losses must be carried forward to be offset against capital gains in future income years.