Edited version of private advice

Authorisation Number: 1052193368728

Date of advice: 16 November 2023

Ruling

Subject: CGT - cryptocurrency

Question:

Is the capital gain you make due to the sale of your New Cryptocurrency coins a discount capital gain?

Answer:

No.

This ruling applies for the following period:

2023-24 income year

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an individual and a resident of Australia for income tax purposes.

You put in money in the form of cryptocurrency for the launch of a new cryptocurrency coin called New Cryptocurrency. New Cryptocurrency is a new layer one smart contract platform for cryptocurrency (like Ethereum).

You made your investment a couple of years ago. The technology of the project has taken much longer than you anticipated. You had expected at the time of making your investment that the project would launch soon after the completion of the investment period.

You understand that software is difficult and often takes longer than anticipated. In this instance, millions of dollars are at stake and the developer wanted the product to be flawless. Hence, the delay.

The sales pitch stated that there was a set number of New Cryptocurrency coins per dollar put in, plus a multiple. Before making your investment, it was written on the New Cryptocurrency website how many New Cryptocurrency coins would be given for every $US 1 invested.

There is also a volume multiplier - whoever puts in the most gets the biggest bonus.

There is no traditional contract or 'expectation of the work from others'. Basically, the founder wanted to avoid having the project classified as a security by the Howie test in the USA. At the time of putting the money in, you knew how many New Cryptocurrency coins you would receive per $US 1 plus the volume multiplier.

You have known since the end of the capital raising stage how much you would receive. However, the exact number was not finalised at that time.

Even though the number of coins was not originally unitised, the investment was not refundable nor held in trust.

The New Cryptocurrency launch was completed more recently. On that date, New Cryptocurrency coins were deposited into your address.

You will sell some of your New Cryptocurrency coins during the period of this ruling (but within 12 months of receiving them) and make a capital gain from this sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Division 109

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 115-25

Reasons for decision

Summary

The capital gain you make due to the sale of your New Cryptocurrency coins is not a discount capital gain.

Detailed reasoning

A discount capital gain is a capital gain that meets the following requirements:

•         The capital gain is made by a particular type of entity such as an individual

•         The capital gain is made after 21 September 1999

•         There is no indexation in the cost base of the asset

•         The capital gain does not result from an excluded CGT event, and

•         There is a clear 12 months between the acquisition date and the time of the CGT event.

The first four requirements are satisfied. Your issue is whether the fifth requirement is also satisfied.

When is the time of the CGT event?

For the purpose of this ruling, you will sell these New Cryptocurrency coins before the first anniversary of receiving them.

CGT event A1 will happen due to the sale of your New Cryptocurrency coins because the sale is a disposal of them.

The time of CGT event A1 is when you enter into the contract for the sale of your New Cryptocurrency coins or, if there is no contract, when the change of ownership from you to the new owner occurs.

You make your capital gain from CGT event A1 at the time of the event.

When is the acquisition date?

In general, you acquire a CGT asset when you become its owner.

However, there are special rules if a CGT event happens for another entity due to your acquisition. Effectively, your acquisition date is aligned with the time of the CGT event for the other entity.

The manner of your acquisition of New Cryptocurrency coins warrants consideration of the possible application of various CGT events, however, in the circumstances of your case it is considered that the most appropriate conclusion is that your acquisition represents a disposal of those same New Cryptocurrency coins by representatives of the founder.

You have acquired your New Cryptocurrency coins from representatives of the founder. That is a disposal of these New Cryptocurrency coins by them, which is CGT event A1.

The acquisition date for you under CGT event A1 is when the disposal contract was entered into or, if none, when the other entity stopped being the asset's owner.

Was there a contract to acquire the New Cryptocurrency coins?

The essential characteristics of the formation of a contract in relation to dealings between parties have been considered by the courts on many occasions. One such instance was in Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424 where the principle was stated as:

It is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty. In such cases as the present, therefore, in order that a contract may be created by offer and acceptance, it is necessary that what is alleged to be an offer should have been intended to give rise, on the doing of the act, to an obligation. The intention must, of course, be judged in the light of the principle laid down in Freeman v Cooke (1848) 2 Ex 654, at p 663 (154 ER 652, at p 656), but, in the absence of such an intention, actual or imputed, the alleged "offer" cannot lead to a contract: there is, indeed, in such a case no true "offer".

A test which has not seldom been applied in such cases in order to determine whether a contract has been made or not is to ask whether there has been a request by the alleged promisor that the promisee shall do the act on which the latter relies. Such a request may, of course, be expressed or implied.

To be a contract, the payment by you would need to have been made on the expectation that an obligation would be imposed on the founder in return.

However, the strategy of the founder was to avoid having a legally enforceable duty as would occur if there was a traditional contract or a promise of the type described above.

Consequently, you did not have a contract for the purchase of New Cryptocurrency coins by making your investment. At that time, the nature of the understanding between you and the representatives of the founder were less than is required to be a contract for the purchase of the New Cryptocurrency coins that you subsequently acquired.

You have not otherwise entered into any formal agreement that might be considered to be a contract at any other time.

Therefore, you have not become the owner of your New Cryptocurrency coins under a contract so your acquisition date of them is the date they were deposited to your address. That is the date the former owner stopped owning them.

Is there more than 12 months between the acquisition date and the time of the event?

The acquisition date of your New Cryptocurrency coins is the date you received them. You will sell the New Cryptocurrency coins before the first anniversary of receiving them.

The difference between the acquisition date and the time of CGT event A1 will be less than 12 months.

Consequently, the 12-month condition is not satisfied, and the capital gain is not a discount capital gain.