Edited version of private advice

Authorisation Number: 1052186621694

Date of advice: 3 July 2024

Ruling

Subject: Assessable income

Question

Are the Reward tokens derived from cryptocurrency deposited with a crypto lender assessable income?

Answer

Yes, however if you receive further information that amends the value of the Reward tokens you actually received, you can request to amend the income tax return for the relevant income tax year or you may object to the notice of assessment if it is outside of the period of review.

This ruling applies for the following periods:

year ended 30 June 2021

year ended 30 June 2022

The scheme commenced on:

31 August 2019

Relevant facts and circumstances

In late 20XX, you opened an account and commenced transferring/depositing your cryptocurrency with US based crypto lender Celsius Network LLC (Celsius Network). You deposited your cryptocurrencies into the account. Your cryptocurrency was deposited into an account under the "Earn" programme. This entitled you to earn Reward tokens (a form of interest income). When you opened the account you did not review the programme's term and conditions in detail.

When you transferred/deposited your cryptocurrency to Celsius Network you had the broad impression that Celsius Network would hold your assets in isolation, (not co-mingle your digital assets with other client digital assets) and Celsius Network would lend out your digital assets to institutions and charge interest. You were not informed that Celsius Network made decisions to use your digital assets for other purposes such as purchase Bitcoin mining equipment.

You received the following information from Celsius Network when they updated the Terms of Service conditions on the XX July 20XX that specifically related to the "Earn" accountholders:

•         "Your Celsius Account is not a deposit or checking account, and Celsius does not hold any Digital Assets on your behalf. All Eligible Digital Asset balances on your Account represent Digital Assets are either loaned from you to Celsius or held by it as collateral, and therefore, held and/or controlled by Celsius (under the applicable, as further detailed herein), and Celsius' obligation to deliver such Digital Assets back to you upon the termination of the applicable Service."

•         "Earn Rewards is not an investment program nor a speculative tool. Rather, you are earning Rewards as a financing fee on the loan of Digital Assets you have transferred to Celsius, in accordance with the rates published by Celsius from time to time, in accordance with these Terms.

By virtue of agreeing to these Terms and transferring any Eligible Digital Assets to the Virtual Wallet provided by Celsius via our platform..., you agree to lend such Digital Assets to Celsius..."

•         "All digital assets transferred to Celsius as part of the services are owned and held by Celsius for its own account in accordance with these terms, and under no circumstances does Celsius hold digital assets on your behalf as part of the services."

When Celsius Network updated the Terms of Service in July 2021, this was when you became aware that Celsius Network was the owner of the digital assets you transferred/deposited with them.

You had received notifications via your Celsius Network App regarding the variations to the Terms of Service. Via the App, you needed to acknowledge that you had reviewed and accepted the variation to the Terms of Service prior to proceeding to carrying the activity you intended to do when you accessed your App. You state you read the variations to the Terms of Service but found it difficult to identify, compare and understand what variations were made.

You received from Celsius Network a form of interest income because you invest your cryptocurrency with them. The interest income is in the form of Rewards that are called CEL Tokens. Celsius Network paid interest weekly which would result on earning compounding interest if not withdrawn.

Each Monday, the interest rate was published for CEL Tokens to be calculated. You were advised there were varying factors how interest rates were determined and complex equations used. The interest rate can differ depending on the cryptocurrency and its demand and supply. Incentives such as bonus CEL Tokens would be offered to attract more of a particular cryptocurrency being deposited with Celsius Network.

You have received the following CEL Reward tokens for the following financial years:

•         20XX-XX financial year X CEL tokens

•         20XX-XX financial year Y CEL tokens.

You did not withdraw, trade or sell any of the Reward CEL tokens.

On 13 July 2022, Celsius Network filed for Chapter 11 Bankruptcy in the Southern District of New York, USA. As a result, investors funds in Celsius Network were frozen, including yourself.

On 4 January 2023 the United States Bankruptcy Court Southern District of New York issued a decision regarding the ownership of "Earn" account assets before 15 July 2022 (in this matter, known as "Petition Date") (Chapter 11, Case number: 22-10964 (MG)). Since filing for bankruptcy under Chapter 11 there was a dispute between the debtor (Celsius Network) and creditors ("Earn" accountholders) about who held ownership of the digital asset. The court ruled, under contract law in the state of New York, "...the Terms of Use formed a valid, enforceable contract between the Debtors and Account Holders, and that the Terms unambiguously transfer title and ownership of Earn Assets deposited into Earn Accounts from Account Holders to the Debtors." Therefore, any cryptocurrency deposited with Celsius Network into an "Earn" Account is the property of the Celsius Network estate (the Debtor) and the depositors (Creditors) are unsecured creditors of the estate. The Court found the Terms of Use were varied up to 8 versions. The Terms varied with each version clarifying to differing degrees the ownership of the digital assets.

On the 31 January 2023, the Court-appointed Examiner to the Chapter 11 case, Shoba Pillay, released her final report into the examination of Celsius Network's records. The final report is found by conducting a search for docket number 1956 via website page https://cases.stretto.com/celsius/court-docket/#search. Among numerous findings, the Examiner identified concerns with the Rewards as a part of the "Earn" programme. Page 10 states how Celsius Network sold the "Earn" programme. The report stated that Celsius would pay "Earn" account holders "...at least 5% annual interest...". On page 330 of the final report, it highlights Celsius Network inability to meet its customer's liabilities:

Celsius persistently struggled to pay the Rewards it promised to its customers. Celsius's net revenue exceeded Reward obligations to customers by approximately $34 million from 2018 through 2020. But Celsius's Reward obligations to customers in 2021 ($582 million) exceeded net revenue by approximately $1 billion in 2021 (net revenue was negative $433 million before Rewards), and by $380 million in the first half of 2022.

The following are strategies and decisions Celsius Network undertook to attract customers, determining Reward rates and how to pay withdrawal requests (including pages number for the Examiner's final report):

•         Celsius Network was purchasing CEL tokens in the secondary market using its profits to reduce the market supply of the tokens and increase its price. It was creating the perception CEL was a token the public could trust and attract more deposits. (pages 96 to 98)

•         "For most of its existence, Celsius did not have a formal Reward rate determination policy." (page 138) Reward rates were consistently "...based on what it perceived necessary to beat the competition and not based upon the yield it was earning from investing customer assets." (page 20) (page 138) "Reward rates were a centrepiece of the Celsius business model and growth ambitions." (page 137)

•         Normally, an entity would measure its net interest margin (NIM) by comparing its yield on assets to liabilities. However, Celsius Network methodology of calculating its NIM was by comparing yield on its assets to their cost. Therefore, although the NIM calculated by Celsius Network was favourable for their purposes, effectively the NIM was overstated. Using the conventional NIM calculation methodology, the NIM was either negligible or negative and never close to 3%. (page 21).

•         Celsius used new customer deposits to fund customer withdrawal requests (pages 32 to 36 and 355 to 360).

It is likely the value of the Rewards credited to your account with Celsius Network are overstated and as an unsecured creditor you may not receive any Rewards from the distribution resulting from the Chapter 11 proceedings.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 170

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-25

Taxation Administration Act 1953 subsection 14ZW(1)

Taxation Administration Act 1953 subsection 14ZW(2)

Taxation Administration Act 1953 subsection 14ZW(3)

Does IVA apply to this private ruling?

No

Reasons for decision

Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1) contains details of various types of sources of income and when you are required to report the income. TR 98/1 includes investment income. Paragraph 47 of TR 98/1 provides that the general principle is that interest is only derived when it is received or credited.

In your case, the Reward tokens are credited to your Celsius Network wallet which you have access to in the same way as a bank account. Following this same principle, when the Reward tokens are paid/credited to your Celsius Network wallet, you are able to withdraw, trade or sell any of these tokens, and as such the Reward tokens are assessable income to you when they are paid/credited to your wallet. This follows the same principle of interest income being deposited to a bank account and this being assessable income at that time. The amount assessable is the market value of the Reward tokens at that time.

Reporting Reward tokens for income tax purposes

You may receive information from the payer or a related source (such as the Court) that you will be paid a portion or no Reward tokens compared to what was communicated to you via your "Earn" programme account. You might consider the following:

•         If this occurs prior to lodging your income tax return, you will report the revised or updated Reward token amount as interest income for that year. If you are advised you will not be paid any Rewards, you would not report any amount for income tax purposes; or

•         If you have lodged your income tax return for the relevant year and reported the Reward tokens as interest income as advised in your Celsius Network account, you can amend your income tax return if it is within the period of review or time limit that applies to your circumstances. The period of review is either 2 or 4 years from the date the Notice of Assessment is issued to you; or

•         If you intend to request to amend your income tax return because it is outside the period of review, you can object against your assessment. Together with your lodgment of an objection you would need to lodge an application requesting the Commissioner to grant you an extension of time to lodge your Objection application.

Withdrawing the Reward tokens

When the Reward tokens are credited to your Celsius wallet, you have a right to withdraw them. CGT event C2 (the ending of rights) will occur when you withdraw the Reward tokens from your Celsius Network wallet (where the tokens are then transferred to your personally controlled wallet). Depending on whether the value of the Reward tokens increase or decrease between the time they are deposited to your Celsius Network wallet and the time you withdraw them, you will make either a capital gain or a capital loss. The market value of the tokens withdrawn becomes the cost base when/if they are disposed of at a later date - which would then trigger CGT event A1.

This information, for tax purposes, also applies to the circumstances when you withdraw your cryptocurrency asset from your Celsius Network wallet.