Edited version of private advice

Authorisation Number: 1052205739577

Date of advice: 12 January 2024

Ruling

Subject: Non-commercial losses - lead time - crypto currency

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your activity in your calculation of taxable income for the 20YY-YY and 20YY-YY financial years?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You do not satisfy the less than $250,000 income requirement.

You started focusing on crypto mining at the start of the 20YY-YY financial year.

Crypto mining involves using powerful computer hardware to solve complex mathematical puzzles, securing the network, and earning cryptocurrency reward for the works. You have advised that the time spent on mining/research was approximately 2 days per week. You have been involved with technology for serval years and have become self-taught in several areas by using online methods.

To fund the crypto mining, you have used your personal savings and money from your mortgage to fund the start-up cost. You have invested a large sum of money during the 20YY-YY and 20YY-YY financial years. The majority of these expenses related to purchasing equipment to build or improve the mining rigs and most of them have been claimed in full under temporary full expensing.

You have advised that you received your first payment from mining early in the 20YY-YY financial year. In the 20YY-YY financial year there was a total income generated of over $20,000. For the 20YY-YY financial year you have advised that from mining and sales you have generated income of over $20,000 but suffered a large loss overall.

For the part of the mining, you used a dedicated Crypto Mining Host that is based overseas/offshore and has a low-cost energy source, and this would optimisation the cost. For the other mining this was conducted within Australia due to high maintenance level and the machines being built in Australia.

In the 20YY-YY financial year for both crypto currencies you had a combined number of transactions that were less than 300 in total. In the 20YY-YY financial year there was a combined number of transactions that were less than 170 in total.

You also continued to work full time in a senior executive position in both the 20YY-YY and the 20YY-YY financial years.

You ceased engaging in this activity at the end of the 20YY-YY financial year. You have chosen to stop the activity due to the increasing costs associated with crypto mining specifically the substantial energy requirements.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision

You do not satisfy the income requirement contained in subsection 35-10(2E) of the ITAA 1997.

Your crypto mining activity will only be subject to the non-commercial losses provisions if it is carried on as a business. If your activity is not carried on as a business, and cannot reasonably be expected to make a profit, then you cannot avail yourself of the non-commercial loss legislation (Division 35 of the ITAA 1997). Your crypto mining activity will only be potentially subject to these provisions if it was carried on as a business.

If you are in business, your losses are subject to the deferral rule unless the Commissioner exercises his discretion under section 35-55 of the ITAA 1997.

You have asked for lead time relating to cryptocurrency, specifically mining of Bitcoin and Ethereum. When asking for lead time the facts and circumstances are reviewed against the legislation.

The Commissioner may decide that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because the business activity has started to be carried on and:

              i.                because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it, and

             ii.                there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year.

This discretion is intended to cover a business activity that has a lead time between the commencement of the activity and production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. That is, due to the nature of some business activities, they will not produce assessable income in the early years and will not be able to produce a profit at that time.

Taxation Ruling TR 2007/6 provides guidelines in relation to non-commercial business losses and the Commissioner's discretion. TR 2007/6 paragraph 78 does not support any view that the discretion should be available where the failure to make a profit is for reasons other than the nature of the business, such as, a consequence of starting out small and needing to build up a client base, or business choices made by an individual that are not consistent with the ordinary or accepted practice in the industry concerned - such as the hours of operation, location, climate or soil conditions, or the level of debt funding. The discretion is not intended to be available where the failure to produce a tax profit, is for other reasons than because of its nature.

The nature of a cryptocurrency activity is that it is possible to derive assessable income from the first day. The Commissioner does not consider that there is anything inherent or innate in the nature of your business activity that it has not yet been able to make a tax profit. You have advised that a profit was made within the first year of activity and that profit was reinvested into the activity.

The expenses that have been incurred over $200,000 over the two years are a result of applying temporary full expensing for the purchase of equipment related to the running of the activity, and capital expenditure. The equipment that has been purchased would be considered to be depreciating assets and would decline in value over time meaning they have limited effective life. A taxpayer has a choice whether to apply the temporary full expensing provisions in relation to the purchase of their assets for their activity. Alternatively, they may choose to instead apply the general depreciation rules in Division 40 of the ITAA 1997.

A comparison of your facts to the legislation found in Division 35 of the ITAA 1997 and the Commissioner's view as outlined in TR 2007/6 leads to the conclusion that the inability of your activity to make a profit is a result of business decisions and not inherent characteristics of the industry you operate your business in. You were new to cryptocurrency mining/trading in the 20YY-YY and 20YY-YY financial years. Market fluctuations and varying economic conditions are considered a normal risk of being a cryptocurrency miner. From the information you have provided, the application of the temporary full expensing has been applied rather than the general depreciation, and claiming the capital expenditure in full. The loss that has occurred was a result of a decision you have made rather than because of the inherent characteristics of your activity.

As a result, it has been deemed that the inability of your activity to make a profit as outlined in Division 35 of the ITAA 1997 is not 'because of the nature' of the activity being carried on. The requirements of paragraph 35-55(1)(b) have not been satisfied. The Commissioner will not exercise the discretion to allow you to apply your non-commercial losses made in the 20YY-YY and 20YY-YY financial years against your assessable income in those years.

Note that you can only claim the decline in value of a depreciating asset from the start time. The start time is when you begin to use the asset or have it installed ready for use for a taxable purpose, for an income producing purpose.