Edited version of private advice

Authorisation Number: 1052192526297

NOTICE

This is an edited version of a revised private ruling. It replaces the edited version of the private ruling with the authorisation number of 1052089379537.

Date of advice: 25 March 2024

Ruling

Subject: CGT events - crypto assets

Question 1

Does a CGT event occur when you send your Crypto asset 'A' tokens to the smart contract to enter into the stake?

Answer

Yes.

Question 2

Is the first element of the cost base of the Crypto asset 'A' tokens received at the end of the staking, the market value of the property given to acquire it worked out as at the time of acquisition?

Answer

Yes.

Question 3

Are the additional amounts of Crypto asset 'A' tokens received at the end of the stake assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997?

Answer

No.

This private ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commenced on:

1 July 202X

Relevant facts and circumstances

You have invested and staked Crypto asset 'A' tokens into the 'A' project.

'A' is a project to recreate a common banking product call a Time Deposit. It is an ERC-20 token and fully automated in the form of a smart contract on the Ethereum blockchain.

You sent Crypto asset 'A' tokens to the relevant smart contract where the Crypto asset 'A' tokens were sent to a burn address and burnt. You then received X-Shares.

The amount of X-shares acquired upon staking depends on the X-Share price in Crypto asset 'A' terms, the duration of the stake and the amount of Crypto asset 'A' stakes.

When staking, the user agrees to lock up their tokens for anywhere between X to XXXX days.

X-shares are not tokenised and are not transferable or tradeable. The X-shares remain locked in the stake for each user until they trigger the relevant smart contract functions.

Crypto asset 'A' Token Protocol - Clarification

If a stake is not ended by the relevant within X weeks after the end stake date, then a penalty is applied that causes the expiring stake to bleed for X% each week (X.XXX% per day). This means that after X years the penalty takes the entire stake.

When the stake ends, you are minted new Crypto asset 'A' tokens. This includes a yield/rewards component in addition to the principal amount of Crypto asset 'A' tokens initially invested.

The rewards

•         The Crypto asset 'A' tokens received from yield/rewards is determined by a combination of the number of X-Shares held, the length of stake and the penalties paid out during the stake.

•         The rewards received are equivalent to the rate of inflation (3.69%pa) plus the penalties received. The penalties received is related to the number of individuals ending their stake prior to their time lock expires.

•         The exact yield received is not known until the user preforms the relevant function. Only at this point is the exact amount, of penalties received during the stake received is known.

•         It is for this reason each matured staking process will attract a different yield even if the same amount was staked over the same period of time.

Your current Stakes

•         Staked X,000 Crypto asset 'A' tokens on XX X 20XX - Matures on XX X 20XX (Stake length X years).

•         Staked X,000 Crypto asset 'A' tokens on XX X 20XX - Matures on XX X 20XX (Stake length X years).

•         Staked XX,000 Crypto asset 'A' tokens on XX X 20XX - Matures on XX X 20XX (Stake length XX years).

•         Staked X.XXX Crypto asset 'A' tokens on XX X 20XX- Matures X XX 20XX (Stake length X years).

•         Staked X,000 Crypto asset 'A' tokens on XX X 20XX - Matures on X X 20XX (Stake length X years).

•         Staked XX,000 Crypto asset 'A' tokens on XX X 20XX - Matures on X X 20XX (Stake length X years).

•         Staked XX,000 Crypto asset 'A' tokens on XX X 20XX - Matures on X X 20XX (Stake length X years).

Your matured Stakes

•         Crypto asset 'A' tokens staked X,XXX.XXX on XX X 20XX - Matured on XX X 20XX (stake length XXX days). At the end of the stake on XX X 20XX - you received X,XXX.XXX Crypto asset 'A' tokens in total (Principal - X,XXX.XXX & Yield - XXX.XXX).

Assumption

Your crypto asset activity is treated as an investment and the crypto used in the investment activities are seen as Capital Gains Tax (CGT) assets under section 108-5 of the Income Tax Assessment Act 1997. Therefore, if you dispose of your crypto assets, then CGT may apply on the disposal.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 112-20

Reasons for decision

Question 1

Does a CGT event occur when you send your Crypto asset 'A' tokens to the smart contract to enter into the stake?

Answer

Yes.

Summary

CGT event C2 occurs when you send your Crypto asset 'A' tokens to the smart contract to enter into the stake.

Detailed reasoning

Under CGT event A1 in section 104-10 of the ITAA 1997:

•         CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1)).

•         You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner (subsection 104-10(2)).

A change (or transfer) of ownership to another entity is required for CGT event A1 in section 104-10 to occur.

In the circumstances under consideration, upon engaging the function of the smart contract to 'stake' Crypto asset 'A' tokens, the immutable code of the smart contract sends the Crypto asset 'A' tokens to an address that does not have a private key (i.e. a burn address). Burning involves a one-way transaction. It is not possible for any party to ever access the tokens in the burn address.

While it may be the case that the purported entity referred to as 'A' created the smart contract, it still does not follow that the purported entity becomes the owner of the staked Crypto asset 'A' tokens at any stage.

There would be no basis to imply a contractual term transferring ownership of the Crypto asset 'A' to the purported entity as the staking arrangement can function without implying such a term (i.e. it is not necessary to give effect to business efficacy). In the absence of an express contractual term transferring ownership to the purported entity (i.e., in the terms and conditions), there has been no change of ownership to another entity.

There are no facts that demonstrate that an entity takes ownership of the Crypto asset 'A' tokens once they are sent to the burn address. Therefore, CGT event A1 does not occur.

CGT Event C2

While CGT event A1 will not occur upon the sending of the Crypto asset 'A' tokens to the burn address under the facts of this arrangement, CGT event C2 would occur.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

(a)   Being redeemed or cancelled; or

(b)   Being released, discharged or satisfied; or

(c)   Expiring; or

(d)   Being abandoned, surrendered or forfeited; or

(e)   If the asset is an option - being exercised; or

(f)    If the asset is a convertible interest - being converted.

We would consider that your ownership of the Crypto asset 'A' tokens has ended by being abandoned, surrendered or forfeited as the tokens have been burnt and removed from circulation with no possibility of recovery.

Question 2

Is the first element of the cost base of the Crypto asset 'A' tokens received at the end of the staking, the market value of the property given to acquire it worked out as at the time of acquisition?

Answer

Yes.

Summary

Your receipt of Crypto asset 'A' tokens when the stake ends is the acquisition of a new CGT asset, with a cost base equal to the market value of the property you gave in respect of acquiring it, under section 110-25 of the ITAA 1997 worked out at the time the new HEX tokens are acquired.

Detailed reasoning

Your original Crypto asset 'A' tokens were sent to a burn address and are taken permanently out of circulation. Therefore, when you obtain Crypto asset 'A' tokens upon entering into the end stake function in the relevant contract, these cannot be the same assets you originally had. When you receive the new Crypto asset 'A' tokens, you acquire a new CGT asset.

In regards to the cost base of the new Crypto asset 'A' tokens, under section 110-25 of the ITAA 1997, the cost base of a CGT asset consists of 5 elements, including, relevantly, the first element at subsection 110-25(2):

a)    The total of any money you have paid to acquire the asset, and

b)    The market value of any property you gave or was required to give, in respect of acquiring it (worked out as at the time of the acquisition)

The original Crypto asset 'A' tokens are considered to be property given for the purposes of paragraph 110-25(2)(b). Your entitlement to the new Crypto asset 'A' tokens is contingent on your ownership of the original Cryptocurrency 'A' tokens ending. Therefore, the new Crypto asset 'A' tokens would not have a zero cost base but instead would have a cost base equal to the market value of the original Crypto asset 'A' tokens worked out at the time the new Crypto asset 'A' tokens were acquired.

For an asset you don't acquire from another entity, you are generally taken to acquire it when you start working on the creation of that asset. In the circumstances you describe, we think that is most accurately the time you sent your original Crypto asset 'A' tokens to the burn address (the first step in creating the new Crypto asset 'A' tokens).

Question 3

Are the additional amounts of the Crypto asset 'A' tokens received at the end of the stake assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

No.

Detailed reasoning

The Commissioner notes that while 'A'.com refers to the relevant activities undertaken by Crypto asset 'A' holders as 'staking' or 'mining', the activities involving burning appear to have no direct link to consensus. Despite the descriptions adopted by 'A'.com, it would appear that the relevant activities are significantly different to those considered in the Commissioner's general guidance on staking rewards.

Subsection 6-5(1) of the ITAA 1997 states that 'your assessable income includes income according to ordinary concepts, which is called ordinary income'.

Subsection 6-5(2) further states that 'if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year'.

Subsection 6-5(4) clarifies that 'in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct'.

Ordinary income has generally been held to include three categories: namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

a)    are earned

b)    are expected

c)    are relied upon, and

d)    have an element of periodicity, recurrence or regularity.

At the end of the arrangement, you receive new Crypto asset currency 'A' tokens that are meant to represent the amount of the original Crypto asset 'A' tokens sent to the smart contract and also additional Crypto asset 'A' tokens that represent a payout calculated based on the length of time your Crypto asset 'A' tokens have been out of circulation. The additional Crypto asset 'A' tokens do not have the obvious characteristics of ordinary income. They are not obviously income from holding property as the original property was burned upon entering into the stake and no longer existed from that point. They are also not obviously income from providing services as you apparently did not provide any relevant service to obtain the additional Crypto asset 'A' tokens. None of the other usual categories or characteristics of ordinary income appear relevant in the circumstances you describe. Therefore, the additional Crypto asset 'A' tokens received are not assessable income under section 6-5 of the ITAA 1997.