Edited version of private advice

Authorisation Number: 1052180358143

Date of advice: 30 October 2023

Ruling

Subject: CGT asset - cryptocurrency

Question

Is your unspent transaction output (UTXO) a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The quantity of bitcoin corresponding to the UTXO is a CGT asset.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for Australian taxation purposes.

You acquired an amount of bitcoin as follows:

a)  You downloaded the software required to operate a full node on the Bitcoin blockchain. This software also includes functions to create private keys (and from those keys, public keys and addresses), scan the Bitcoin blockchain, and process transaction requests.

b)  You created a bitcoin wallet to manage your private keys.

c)   You created a bitcoin address (the Address).

d)  You accessed 'Bitcoin.com' and paid an amount of money for a third party to direct an amount of bitcoin to the Address.

The transaction created an unspent transaction output (UTXO).

The UTXO:

   a) is held by you as an investment.

   b) is not held by you for personal use or enjoyment.

You intend to dispose of the UTXO in the future in exchange for the Australian dollar market value of the associated bitcoin.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 subsection 108-5(2)

Reasons for decision

CGT asset

The term 'CGT asset' is defined in subsection 108-5(1) of the ITAA 1997 as:

a) any kind of property; or

b) a legal or equitable right that is not property.

Subsection 108-5(1) states that, to avoid doubt, these are CGT assets:

a) part of, or an interest in, an asset referred to in subsection (1);

b) goodwill or an interest in it;

c) an interest in an asset of a partnership;

d) an interest in a partnership that is not covered by paragraph (c).

Further, 'Note 1' provides that examples of CGT assets are:

•         land and buildings;

•         shares in a company and units in a unit trust;

•         options;

•         debts owed to you;

•         a right to enforce a contractual obligation;

•         foreign currency.

Is bitcoin 'any kind of property'?

The Commissioner's view on whether bitcoin is a 'CGT asset' for the purposes of subsection 108-5(1) of the ITAA 1997is contained 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? (TD 2014/26).

In Yanner v Eaton [1](Yanner) the High Court accepted that property refers not to a thing but to a description of a legal relationship with a thing; and, more specifically, to the degree of power that is recognised in law as permissibly exercised over the thing. Noting the difficulties in determining what is meant by 'property' in a thing, their honours quoted Professor Gray who stated '[a]n extensive frame of reference is created by the notion that 'property' consists primarily in control over access'.[2]

There is no single test nor a single determinative factor for identifying a proprietary right.[3] Courts have emphasised different characteristics in different circumstances.[4] One formulation that has been applied in Australia in identifying a proprietary right is the 'Ainsworth test' developed by Lord Wilberforce - which asks whether a right or interest is definable, identifiable and capable of assumption by third parties, and permanent or stable to some degree.[5] Lord Wilberforce's reference to a 'right or interest' reflects that it is the right in the thing which comprises property, not the 'thing' itself. In the case of Mrs Ainsworth, it was her relationship to the Milward Road house (being a right to occupy) that comprised the property, not the house. In your case, it is your bundle of bitcoin holding rights which are to be considered. It is by reference to these rights that the Commissioner defines the property in bitcoin in TD 2014/26.[6]

Courts have also focused on factors such as excludability (whether it is possible to exclude others from the right in question),[7] commercial value (whether something is treated in commerce as a valuable proprietary right),[8] and enforceability of the right against third parties generally.[9]

In respect to the meaning of 'property', Gummow J in Hepples v Federal Commissioner of Taxation [10] (Hepples) referred to Kirby (Inspector of Taxes) v Thorn EMI plc [11]:

Property' is not a term of art, but takes its meaning from its context and from its collocation in the document or Act of Parliament in which it is found and from the mischief with which that Act or document is intended to deal... The context in the instant case is a taxing Act which is concerned with assets and with disposals and acquisitions, gains and losses. I can see no reason to doubt that in s. 22 'property' bears the meaning of that which is capable of being owned, in the normal legal sense, and that it does not bear the extended meaning that would be needed if it were to include a person's freedom to trade.

In determining whether something amounts to property it is necessary to weigh up a range of factors, and to treat none as definitive.

In the case of determining whether Bitcoin is property, it is necessary to consider the relationship between:

a)    the object or thing, bitcoin, being the digital representation of value constituted by three interconnected pieces of information (a bitcoin address; the bitcoin holding or balance in that address; and the public and private keypair associated with that address), and

b)    the bundle of rights (hereafter referred to as 'bitcoin holding rights') ascribed to a person with access to the bitcoin under the bitcoin software and by the community of bitcoin users.

The most important of these bitcoin holding rights are the rights of control over one or more bitcoin in the holder's bitcoin wallet, for example, the capacity to trade a bitcoin for other value or use it for payment.

However, there are other factors that support the conclusion that bitcoin holding rights are proprietary in nature. The most compelling is that bitcoins are treated as valuable, transferable items of property by a community of bitcoin users and merchants. There is an active market for trade in bitcoin and substantial amounts of money can change hands between transferors and transferees of bitcoin.

The above factors were influential in the English case of Armstrong DLW GmbH v. Winnington Networks Ltd [12] (Armstrong v Winnington) which held that European Union Allowances (EUAs) constitute intangible property. EUAs possess similar characteristics tobBitcoin in that they are entirely electronic, tradeable and can involve substantial amounts of money being exchanged.

Further, bitcoin holding rights also involve an inherent excludability because the bitcoin software restricts control of a bitcoin holding to the person in possession of the relevant private key. As the bitcoin software prescribes how the transfer and trade of bitcoin can occur and transactions are verified through the bitcoin mining process, bitcoin holding rights are definable, identifiable by third parties, capable of assumption by third parties, and sufficiently stable as per the Ainsworth test.

In weighing all these factors, the Commissioner's view is that bitcoin holding rights amount to property within the meaning of paragraph 108-5(1)(a). As such, a person holding a bitcoin is considered to hold a 'CGT asset' for the purposes of that provision.

This view is supported by the tax authorities of other countries[13] such as the United States of America (US) and the United Kingdom (UK), as follows:

•         The US Internal Revenue Service (IRS) treats virtual currencies as property and considers that general tax principles apply to transactions using virtual currency.[14]

•         The position in the UK is guided by the Legal statement on cryptoassets and smart contracts (2019)[15] which states that crypto assets have all the indicia of property, and no features that disqualify them from being property, and should be treated in principle as property [at 15]. The authors refer to B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) in support of their position[at 58].

As described in Yanner, property refers to a relationship between a person and a thing which is recognised in law. As Sackville J observed in Wily v St George Partnership Banking Ltd[16]:

From a lawyer's perspective, the concept of property is inextricably interwoven with the content of legal rules and principles. As Jeremy Bentham observed (Theory of Legislation, Kegan Paul, ed, 1911, at 113)

"Property and law are born together, and die together. Before laws were made there was no property; take away laws, and property ceases."

It is not surprising, therefore, that there is often an element of circularity in determining whether a particular interest should be classified as proprietary or not. Are remedies granted because an interest is proprietary? Or is the interest proprietary because legal or equitable remedies are available to the holder?

Doubtless, it is unwise to be dogmatic about the indicia of a proprietary interest...

Having regard to the authorities on the meaning of 'property', it is critical to consider whether courts are prepared to endorse the relationship between a person and their bitcoin as being proprietary.

Since the publication of TD 2014/26, various Australian and international courts have found or accepted, directly or indirectly, that crypto assets such as bitcoin are property. We refer you to:

•         AA v Persons Unknown [2019] EWHC 3556 (Comm) (AA v Persons Unknown): A UK High Court case that considers whether bitcoin is property. The Court found that crypto assets such as bitcoin are property as, among other reasons, they meet the criteria laid out in the Ainsworth test [at 59]. It cited two earlier interlocutory judgments where freezing and preservation orders were made over crypto assets.

•         B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) (Quoine): A Singapore case where the International Commercial Court accepted that crypto assets met the requirements of the Ainsworth test and could be treated as property [at 142]. Although this case was the subject of an appeal, the relevant finding was not disturbed.

•         Ruscoe v Cryptopia Ltd [2020] NZHC 728 (Ruscoe): A New Zealand High Court case that cited AA v Persons Unknown and Quoine in accepting that crypto assets are property [at 133]. It held that the crypto assets do not consist of pure information and are both excludable and exhaustible; at [96] - [98].

•         Commissioner of the Australian Federal Police v Bigatton [2020] NSWSC 245 (Bigatton): A Supreme Court of NSW decision related to the Proceeds of Crime Act 2002 (Cth). The Court orders were predicated on bitcoin and ethereum being property.

•         Seribu Pty Ltd v Federal Commissioner of Taxation [2020] AATA 1840: An Australian case that considered whether Bitcoin was a foreign currency for tax purposes. The AAT accepted the Commissioner's submissions that Bitcoin was taxable in Australia either as ordinary income or under the CGT rules [at 30].

•         Chen v Blockchain Global Ltd [2022] VSC 92: A Supreme Court of Victoria decision concerning Rule 37.01(1) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) which allows a Court to make an order for the inspection, detention, custody or preservation of 'any property'. In this case, the Court determined that relief be granted under rule 37.01(1) to preserve the Bitcoins (so as to prevent the Court's ultimate determination being abortive) [at 37].

•         Tulip Trading Limited [2023] EWCA Civ 83: A UK Court of Appeal decision that approves the decision in AA v Persons Unknown [at 24]. The decision provides that bitcoin is both transferrable and 'rivalrous', in the sense that the holding of it by one person necessarily precludes another from simultaneously holding it. These characteristics establish that bitcoin is capable of assumption by a third party.

•         ByBit Fintech Limited v Ho Kai Xin and Others [2023] SGHC 199: A Singapore High Court case where it was held that the stablecoin Tether is property capable of being held on trust [at 4].

•         Gatecoin Limited [2023] HKCFI 914: A Hong Kong Court of First Instance decision which followed numerous cases that accepted that crypto assets are property, including:

­   Hong Kong cases - Nico Constantijn Antonius Samara v Stive Jean-Paul Dan [2021] HKCFI 107841; Yan Yu Ying v Leung Wing Hei [2021] HKCFI 3160; Huobi Asia Limited & Anor v Chen Boliang & Anor [2020] HKCFI 2750.

­   US cases - United States v 50.44 Bitcoins, Civil Action No. ELH-15-3692, (D Md 31 May 2016), Lagemann v Spence, 2020 U.S. Dist. LEXIS 88066 (SDNY 18 May 2020), Meta-Tech Consultants, LLC v Niu, 2021 US Dist LEXIS 209207 (D Nev, 29 October 2021), BDI Capital v Bulbul Investments LLC 446 F.Supp.3d 1127 (2020).

­   Cases as mentioned further above - AA v Persons Unknown, Quoine, Ruscoe and Bigatton [at 45-59].

This body of cases establishes that an interest in a crypto asset is a right in rem. The law recognises that a bitcoin is capable of ownership and protection by action against an indeterminate class and is not generally liable to be defeated by alienation.[17] Holders enjoy a legally endorsed control over access to their bitcoin.[18] The Commissioner is not aware of any authority from any jurisdiction in the world which directly concludes that bitcoin, or any other crypto asset, is not property.

Analysis

As stated above, in determining whether something amounts to property, it is necessary to weigh up a range of factors, and to treat none as definitive. These include whether a right is:

•         definable, identifiable and capable of assumption by third parties, and permanent or stable to some degree

•         excludable (whether it is possible to exclude others from the right in question)

•         commercially valuable (whether something is treated in commerce as a valuable proprietary right)

•         enforceable against third parties generally.

In the case of bitcoin, also as noted above:

•         A holder of bitcoin has the right of control over one or more bitcoin in the holder's bitcoin wallet, for example, the capacity to trade a bitcoin for other value or use it for payment

•         bitcoin are treated as valuable, transferable items of property by a community of bitcoin users and merchants

•         bitcoin holding rights involve an inherent excludability because the bitcoin software restricts control of a Bitcoin holding to the person in possession of the relevant private key

•         bitcoin holding rights are definable, identifiable by third parties, capable of assumption by third parties, and sufficiently stable as per the Ainsworth test.

In your case, you acquired an amount of bitcoin, represented on the bitcoin blockchain as a UTXO. As such, you have the ability to:

•         control if and when the UTXO is used as an input for a transaction,

•         control whether the resulting transaction output is directed to a third party,

•         by virtue of this practical control, trade bitcoin for fiat currency, other crypto assets, goods or services.

Consequently, in weighing up the full range of relevant factors as outlined above, and the case law relating to bitcoin and other crypto assets, it is evident that your relationship with the UTXO constitutes property. Courts within Australia and internationally have consistently held that the relationship between a person and bitcoin is proprietary in nature.

Therefore, the UTXO you hold is a CGT asset for the purposes of subsection 108-5(1) of the ITAA 1997.

[1] (1999) 201 CLR 351 at 365-7 [17]-[19].

[2] Ibid at 366 [18].

[3] See, for example, Meagher, Heydon and Leeming, Meagher, Gummow & Lehane's Equity: Doctrines and Remedies (4th ed, 2002) at [4-015] (identifying various characteristics of proprietary rights, but remarking that it is 'incorrect to assume that unless all these characteristics are present there cannot be 'property'').

[4] For one commentator's summary of some of the main approaches, see Moses, 'The Applicability of Property Law in New Contexts: From Cells to Cyberspace' (2008) 30 Sydney Law Review 639 at 647-652.

[5] National Provincial Bank Ltd v. Ainsworth [1965] AC 1175 at 1247-8, approved in, for example, R v. Toohey; Ex parte Meneling Station Pty Ltd (1982) 158 CLR 327 at 342

[6] At paragraph 8(b) of that Determination.

[7] See, for example, Milirrpum v. Nabalco Pty Ltd (1971) 17 FLR 141 at 272; Potter v. Commissioners of Inland Revenue (1854) 156 ER 392 at 396.

[8] See, for example, Halwood Corporation Ltd v. Chief Commissioner of Stamp Duties (1992) 33 NSWLR 395 at 403.

[9] See, for example, Wily v. St George Partnership Banking Ltd (1999) 84 FCR 423 at 426.

[10] [1990] 90 ATC 4497 at 4513.

[11] [1988] 2 All ER 947 at p. 953.

[12] [2012] 3 WLR 835 at 848 [49].

[13] The OECD report: Taxing Virtual Currencies - An overview of tax treatments and emerging tax policy issues, found that 'in the majority of cases, countries consider crypto-assets to be a form of property for tax purposes' [1.2.3 at 15].

[14] Notice 2014-21 - https://www.irs.gov/pub/irs-drop/n-14-21.pdf.

[15] UK Jurisdiction Taskforce, LawTech Delivery Panel, Ministry of Justice.

[16] [1999] FCA 33 [5]-[6].

[17] This being the definition of a right in rem recognised by A. M .Honoré cited with approval in Wily v St George Partnership Banking Ltd [1999] FCA 33 at [38].

[18] This being an indicium of property observed by the High Court in Telstra Corporation v Commonwealth [2008] HCA 7 at [44].