Edited version of private advice

Authorisation Number: 1052174024483

Date of advice: 29 September 2023

Ruling

Subject: Capital loss on cryptocurrency transactions

Question

Are you entitled to claim a capital loss from your cryptocurrency investment?

Answer

Yes.

This ruling applies for the following periods:

Period ended 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You invested in a cryptocurrency called XXXXX.

You are an investor and not a cryptocurrency trader.

During the relevant period, you conducted a specified number of "buy" and "sell" transactions of XXXXX.

You had staked the XXXXX cryptocurrency for a period of 28 days and during that time, then chain split occurred.

Upon the chain split, Terra released a new chain (Terra 2) and allocated a new, separate XXX v2 token to holders of the original asset.

Terra Station required holders of the asset to use the TFM webapp to perform swaps on the Terra XXXXX chain.

You made several attempts to conduct the swaps, however this was not possible for the XXXXX asset, as the platform gave you error messages, stating that the cryptocurrency was not able to be swapped.

You provided evidence of error messages when attempting to swap the XXXXX cryptocurrency.

The Terra Station wallet discontinued support for swaps on what they began to refer to as the XXXXX chain.

You have been unable to withdraw / convert your XXXXX cryptocurrency to a fiat currency, such as AUD, USD, or EUR.

You have stated that XXXX token do not have the same rights or relationships as the original XXXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 116-45

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens.

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.

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 explains that Bitcoin, and by extension, cryptocurrency in general is a CGT asset.

The disposal of cryptocurrency that is not part of a business or commercial transaction will give rise to CGT event A1 under subsection 104-10(1) of ITAA 1997. A capital gain or loss is worked out at the time of disposal.

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.

If CGT event A1 occurs and you receive no capital proceeds, you will be deemed to receive the market value of the CGT asset you have disposed of as capital proceeds.

Capital loss

A capital loss can only arise if a capital gains tax (CGT) event happens. Most CGT events involve a CGT asset. The gain or loss is made at the time of the CGT event.

Section 116-45 of the ITAA 1997 provides that the capital proceeds from a CGT event are reduced if it is unlikely that the taxpayer will receive some or all of those proceeds. However, this rule only applies if the non-receipt did not arise because of anything the taxpayer (or an associate) did or did not do and all reasonable steps were taken to get the unpaid amount paid. The amount of the reduction is the unpaid amount.

A chain split occurs when there are two or more competing versions of a blockchain.

These competing versions share the same history up to the point where their core rules diverge.

As an investor, if you receive a new crypto asset as the result of a chain split (such as Bitcoin Cash being received by Bitcoin holders), the value of the new crypto asset is not treated as either:

•         ordinary income

•         a capital gain at the time you receive it.

However, you need to work out your capital gain or capital loss when you dispose of the new crypto asset you receive as a result of a chain split. The cost base of a crypto asset you receive as a result of a chain split is zero ($0).

Where no original cryptocurrency asset exists after the split, the original crypto asset may no longer exist if none of the crypto assets you hold after the chain split have the same rights or relationships as the original.

Where this is the case a C2 CGT event happens to the original asset. Therefore, each crypto asset you hold is a new asset with an acquisition date of the date of the chain split with a cost base of zero ($0).

If your allowable capital losses are greater than your capital gains, you have a net capital loss.

Application to your circumstances

You acquired a CGT asset when you acquired XXXXX cryptocurrency.

Based on the information provided by you, it may be inferred that after the chain split, the new cryptocurrency did not have the same rights or relationships as the original cryptocurrency as you were unable to swap it to the new crypto asset.

The CGT event relevant in your situation is CGT event C2 - cancellation, surrender and similar endings.

CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being cancelled, surrendered, released, discharged, satisfied or abandoned (paragraph 104-25(1)(b) of the ITAA 1997). You are entitled to a capital loss in respect of the XXXXX tokens.