Edited version of private advice

Authorisation Number: 1052191731796

Date of advice: 17 November 2023

Ruling

Subject: CGT - cryptocurrency

Question

Is the cryptocurrency trading undertaken for the income years ending 30 June 202x and 30 June 202x assessable on a revenue basis as opposed to a capital gains basis?

Answer

Yes.

This ruling applies for the following periods

Years ending 30 June 202x to 30 June 202x

The scheme commences on

X Date

Relevant facts and circumstances

A summary of the cryptocurrency trading transactions for income year ending 30 June 202x was provided.

A summary of the cryptocurrency trading transactions for income year ending 30 June 202x was provided.

The intention of in trading in the cryptocurrency to make a profit is evidenced by:

•         the period focused on crypto trading activity, was done in a business-like manner. This care and due diligence was taken in support of a profit motive

•         the number of trades and significant amount of funds invested indicate a profit-making intention with a scale of activity beyond a mere personal interest or hobby, investing with a view of making a profit. There was a commercial purpose and a sense (at the time) or permanence of trading activities to continue

•         the intention was to make short term profits. There was no intention of holding cryptocurrency long-term. The was scale with high-volume short-term trading with a view to benefit from market fluctuations in the short-term.

Relevant legislative provisions

Income Tax Assessment Act 1997 division 70

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

The cryptocurrency trading for the income years ending 30 June 202x, and 30 June 202x is assessable on a revenue basis as there was a profit-making undertaking or scheme.

Detailed reasoning

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

1.    Business income

In this scenario, if the cryptocurrency trading activities constitute the carrying on of a business:

•         the cryptocurrencies are regarded as trading stock, and

•         any gains or losses included in assessable income.

Income from carrying on a business is ordinary income and assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), while expenses are deductible under section 8-1 of the ITAA 1997.

2.    Income from a profit-making undertaking or scheme

In this scenario, if the cryptocurrency trading activities are regarded as a profit-making undertaking or scheme:

•         any income would be ordinary income and assessable under section 6-5 of the ITAA 1997, and

•         the cryptocurrencies are not trading stock, and deductions are available under section 8-1 of the ITAA 1997 for expenses that relate directly to a cryptocurrency transaction.

3.    Capital gains and losses

In this scenario, if the cryptocurrency transactions are regarded as investment activities:

•         any gains resulting from the disposal of cryptocurrencies are income as a capital gain, and

•         any losses sustained on the disposal of cryptocurrencies is a capital loss.

Income from investing activities is statutory income and assessable under section 102-5 of the ITAA 1997, while a loss is calculated under section 102-10 of the ITAA 1997.

To determine which of these treatments applies to this case it is necessary to determine whether the cryptocurrency trading activities amount to the carrying on of a business. If a business is not being carried on, it then needs to be determined whether the activities should be accounted for under scenario 2 or scenario 3, as they result in different tax treatments.

Carrying on a business of cryptocurrency trading

Subsection 995-1(1) of the ITAA 1997 defines 'business' as '...any profession, trade, employment, vocation or calling, but does not include occupation as an employee.'

The Commissioner's view on carrying on a business can be found in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production (TR 97/11). The indicators in TR 97/11 have been developed by the courts of law and are used for all cases about the carrying on of 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.

TR 97/11 provides that the following factors are relevant considerations in determining whether a business exists:

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

b)    whether the taxpayer has more than just an intention to engage in business,

c)    whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity,

d)    whether there is repetition and regularity of the activity,

e)    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,

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

g)    the size, scale and permanency of the activity, and

h)    whether the activity is better described as a hobby, a form of recreation or a sporting activity.

No one indicator is decisive (Evans v FC of T 89 ATC 4540; (1989) 20 ATR 92x), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way (TR 97/11 paragraph 15).

Whether a business is being carried on for income tax purposes is a question of fact and degree, to be determined objectively on the specific circumstances of the case, weighing the various indicators outlined above against one another (Ferguson v. Federal Commissioner of Taxation (1979) 9 ATR 873).

The table at paragraph 18 of TR 97/11 provides a summary of the main indicators of carrying on a business, these were set out alongside their application to the Taxpayers circumstances.

In weighing up all relevant indicators, it is concluded that the Taxpayer was not carrying on a business of cryptocurrency trading for the income years.

A profit-making undertaking or scheme

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) and Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductible (TR 92/4) provide guidance on whether gains and losses from transactions that have a profit-making purpose is assessable under section 6-5 of the ITAA 1997, and deductible under section 8-1 of the ITAA 1997.

According to paragraph 6 of TR 92/3, a profit or loss from an isolated transaction is generally income if:

a)    your intention or purpose in entering into the transaction was to make a profit or gain; and

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

Similarly, according to paragraph 4 of TR 92/4, the same rules apply in determining if losses from an isolated transaction is deductible under section 8-1 of the ITAA 1997.

Furthermore, paragraph 13 of TR 92/3 highlights various factors in considering whether a commercial transaction exists. Relevant factors include:

a)    the nature of the entity undertaking the operation or transaction,

b)    the nature and scale of other activities undertaken,

c)    the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained,

d)    the nature, scale and complexity of the operation or transaction,

e)    the manner in which the operation or transaction was entered into or carried out,

f)     the nature of any connection between the relevant taxpayer and any other party to the operation or transaction,

g)    if the transaction involved the acquisition and disposal of property, the nature of that property, and

h)    the timing of the transaction or the various steps in the transaction.

In weighing up all of these relevant factors, the Taxpayer's cryptocurrency trading was a profit-making undertaking or scheme.

The Taxpayer cannot claim expenses relating to cryptocurrency unless they can be directly attributable to a particular transaction. This means that the Taxpayer can claim brokerage if it relates specifically to a particular transaction.

As the Taxpayer was not carrying on a business it cannot treat the cryptocurrencies as trading stock as per Division 70 of the ITAA 1997. The profit or loss from each transaction needs to be calculated from the historical purchase price and the historical sale price of each cryptocurrency purchased and sold.

The gains and losses may be statutory income and losses under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997 as a result of a realisation of a capital asset. However, section 118-20 of the ITAA 1997 will apply to reduce a capital gain made from a CGT event to the extent amounts are otherwise included under another provision of the ITAA 1997.