Edited version of private advice

Authorisation Number: 1052228421434

NOTICE

The private ruling on which this edited version is based has been overturned on objection.

This notice must not be taken to imply anything about the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Date of advice: 10 April 2024

Ruling

Subject: Am I in business of cryptocurrency trading?

Question 1

Did your cryptocurrency trading activities during the 20YY-YY and 20YY-YY income years amount to the carrying on of a business?

Answer

No.

Question 2

Are your cryptocurrency trading losses incurred in the 20YY-YY and 20YY-YY income years deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

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 work in a full-time capacity in your profession.

You began trading in cryptocurrency. Your spouse also began trading at the same time.

You intended to generate a profit from trading activities with the objective of reducing your mortgage.

You did not intend to hold your cryptocurrency assets as long term investments.

You spent approximately 30 to 60 minutes per weekday monitoring your investments and researching potential investments. Occasionally you would also monitor your investments and execute trades on weekends.

You used your experience and expertise in your profession when engaged in cryptocurrency trading activities during the relevant period.

You would use your spouses's account A. You had full access and control to the account A.

You engaged in a number of transactions during both years.

You made a loss in both years.

You invested in approximately 40 different assets in Year 1 and 214 different assets in Year 2.

The losses were incurred as a result of the following sequence of events:

You would transfer funds from a bank account (held jointly between you and your spouse) to your spouse's account A.

You would use the account A to convert the Australian currency into crypto assets.

You would then transfer the tokens acquired via your spouse's account A to your cold storage device, which you had purchased and which was under your sole control.

When you wished to exchange tokens stored on your Ledger (Original Tokens) for other tokens:

(a)  You would connect your Ledger to the "Metamask" desktop app on your computer by using a physical cable between the Ledger and the computer.

(b)  You would then open the website "Uniswap" and connect your Metamask wallet (which in turn had the

Ledger connected to it) and exchange tokens held on the Ledger for other tokens,

which had the effect of crystallising any gain or loss that occurred whilst the Original Tokens had been stored on your Ledger.

In addition to Uniswap, you also used other decentralised exchanges, with accounts in your own name, to exchange tokens held on your Ledger.

From time to time you would also trigger gains and losses on tokens held on your Ledger by entering into staking contracts.

The Uniswap service is anonymous and does not require an account. The Metamask service requires an account, which was held in your name.

If you wished to access Australian dollars (AUD):

(a)  You would send crypto assets from your Ledger to your spouse's account A, convert those tokens to AUD and send AUD funds to the joint bank account.

(b)  Generally a negligible gain or loss would be made on the conversion of the crypto assets to fiat currency due to the proximity between acquiring the crypto assets on your Ledger, and disposing of those tokens using your spouse's account A.

Your spouse would dispose of their cryptocurrency assets when they were transferred to your Ledger and you would acquire the cryptocurrency assets. You would make gains and losses on your transfers when exchanging tokens, selling tokens and would earn income from your staking contracts.

When you would transfer cryptocurrency back into your spouse's account A you would make a gain or loss and your spouse would make a gain or loss when receiving the transferred cryptocurrency that they converted to AUD.

The reason for establishing a account A in the name of your spouse was to ensure that you had a secondary "off-ramp" in circumstances where you lost access to your own account B. However after initially using your own account B, it became the usual practice to use your spouse's account A for the onramp and off-ramp transactions.

You initially maintained a spreadsheet of all of your trades in Year 1, however, as the volume of trades increased during that year and into Year 2 your records became incomplete.

You did not maintain a dedicated home office space for your cryptocurrency trading activities.

Apart from engaging accountants to prepare your year-end accounts, you did not engage a third party stockbroker or financial advisor to assist with your trading activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 25-40

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 section 104-5

Reasons for decision

Question 1

Did your cryptocurrency trading activities during the 20YY-YY and 20YY-YY income years amount to the carrying on of a business?

Summary

You were not carrying on a business as a cryptocurrency trader during the 20YY-YY and 20YY-YY financial year. You are regarded as an investor rather than a trader.

Detailed reasoning

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioner's view on the meaning of carrying on a business for primary production and outlines a number of factors developed by courts and tribunals that they have found to be indicative of when a taxpayer is carrying on a business of primary production.

These indicators are also applicable to non-primary production activities:

(a)  the existence of a profit-making and commercial purpose (Walsh J in Thomas v Federal Commissioner of Taxation (1972) ATR 165; 72 ATC 4094 held that the 'existence of a profit-making and commercial purpose' should be considered in light of the other indicia, as well as any knowledge, previous experience or skill of the taxpayer in the relevant activity);

(b)  the taxpayer has more than a mere intention to engage in business;

(c)  the existence of an intention to make a profit or a genuine belief that a profit will be made;

(d)  the size and scale of the activities;

(e)  the repetition and regularity of the activities;

(f)  the activities are carried out in a systematic and organised (i.e. businesslike) manner usual for that type of business;

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

(h)  can the activity be better described as a hobby, a form of recreation or sporting activity.

The above factors must be considered in light of one another, with no single factor being determinative of whether the taxpayer is engaged in carrying on a business. Even where any one factor is not present, this will not necessarily mean that a business is not carried on (paragraph 25 of TR 97/11).

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 (paragraph 16 of TR 97/11).

Upon looking at the above factors: intention, repetition and regularity are considered to be important indicators on whether or not a business is being carried on, with the size and scale of the activity being supporting factors.

Your intention of starting cryptocurrency trading was to generate a profit from trading activities with the objective of reducing your mortgage. You did not intend to hold your cryptocurrency assets as long term investments.

You engaged with the activity for 30 to 60 minutes per weekday monitoring your investments and researching potential investments and occasionally would also monitor your investments and execute trades on weekends. In addition to this during the 20YY-YY financial year you engaged in X transactions and during the 20YY-YY,financial year you engaged in Y transactions.

The time spent daily on the activity and the number of transactions does not indicate a sufficient size and scale as well as repetition and regularity that would be in line with a business of cryptocurrency trading. Whilst you intended to make a profit, your activities resulted in losses. You do not keep businesslike systemic or organised records of your activities.

After considering the above factors and your specific circumstances, you were not carrying on a business as a cryptocurrency trader during the 20YY-YY and 20YY-YY financial year. You are an investor rather than a trader.

Question 2

Are your cryptocurrency trading losses incurred in the 20YY-YY and 20YY-YY income years deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Your cryptocurrency trading losses are considered capital in nature.

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 ITAA 1997, while expenses are deductible under section 8-1 of the ITAA 1997.

As it was previously established that you are not in the business of cryptocurrency trading, you cannot claim deductions for the losses made 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:

•         profits would be assessable income under section 15-15 of the ITAA 1997, and

•         losses would be deductible from the carrying on or carrying out of a profit-making undertaking or plan if any profit from that plan would have been included in your assessable income

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 net capital gains are assessable under section 102-5 of the ITAA 1997, while a loss is calculated under section 102-10 of the ITAA 1997.

As 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.

Taxation Determination TD 2014/26 Income tax: is bitcoin a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997? holds that bitcoin is a CGT asset. This applies to other types of cryptocurrencies as well.

Paragraph 23 of TD 2014/26 advises that the factors relevant in determining whether an isolated transaction amounts to a commercial transaction are listed at paragraph 49 of Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income.

Taxation Ruling TR 92/3 and Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductible 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.

Paragraph 6 of TR 92/3 states that a profit from an isolated transaction is generally income when both of the following elements are present:

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

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

You satisfy the first element as you advised that the intention or purpose was to make a profit or gain.

As determined earlier, the transactions were not entered into during the course of carrying on a business, nor were your activities conducted in a business like or commercial manner. It would be difficult to conclude that the transactions were a business or commercial transaction.

Paragraph 49 of TR 92/3 states lists some factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction; however advises that in very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

In your case the cryptocurrency trading was repetitious or recurring and would not be an isolated transaction.

As you were not in the business of cryptocurrency trading, and the transactions were not of a commercial nature, any income would not be assessable under section 6-5 of the ITAA 1997. As any losses were capital in nature they cannot be claimed as a deduction under section 8-1 of the ITAA 1997.

The gains and losses are 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.

The losses you made are capital losses and can be offset against any capital gains made that year and in future years.

A CGT event happens when you dispose of a CGT asset. For the purposes of crypto assets, that may be when you:

•         sell a crypto asset

•         gift a crypto asset

•         trade, exchange or swap one crypto asset for another

•         convert a crypto asset to Australian or foreign currency

•         buy goods or services with a crypto asset.

As the account A was held in your spouse's name, each disposal from the account A, either to you, or in exchange for fiat currency is a CGT event that must be accounted for by your spouse.

Each disposal that you make from your Ledger, including trading, swapping, and exchanging crypto assets is a CGT event.

If you receive no consideration in exchange for a CGT asset, you are taken to have received the market value of the asset at the time of the CGT event in accordance with section 112-20 of the ITAA 1997.

Staking activities

Any rewards earned from staking are treated as ordinary income under section 6-5 of the ITAA 1997. You will need to declare this income in your return as other income.