Edited version of private advice

Authorisation Number: 1052233839013

Date of advice: 22 March 2024

Ruling

Subject: CGT - am I in business

Question

Is your income from selling the non-fungible token (NFT) you created assessable income under section 6-5 of Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You started building of a small metaverse on specified date on an adhoc basis with the intention to be used for your friend's personal event.

Your primary intention was to showcase the metaverse artwork rather than establishing a profit-seeking venture.

You posted artistic idea to allow users to represent themselves through art which was going to be free. The idea was to make NFT free to anyone that wanted one.

You enjoyed spending your free time building the small metaverse on an adhoc basis.

You engaged in the activity due to your passion for the metaverse that would be used for the personal event.

You did not have a business plan. The NFT activity was more of a spontaneous response to the demand for NFT than a deliberate profit-seeking motive.

You did not have any intention to make a profit from this activity.

You did not conduct appropriate research to understand the market, estimate income, expenses and profit.

Your contention was that this activity would unlikely result in sales due to the small metaverse being free.

You did not claim any tax deductions for this activity.

You do not have knowledge and expertise in the area of the metaverse and cryptocurrency related markets.

You did not keep any records and did not have any businesslike systems in place.

You did not spend much time on the NFT activity.

The small metaverse was published for free and listed the NFT up for sale, not expecting any revenue from its sale.

Your focus was on the free metaverse and NFT sales were an incidental outcome.

You sold the NFT and provided us with the date and amount that the NFT was sold for.

You have no intention to obtain new funds to continue the activity. Since this event, you have made no further additions to the metaverse.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

Reasons for decision

Question

Is your income from selling the non-fungible token (NFT) you created assessable income under section 6-5 of Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

When considered against the factors outlined in TR 97/11 Income tax: am I carrying on a business of primary production? Your activities are not consistent with someone expected to be carrying on a business selling NFT's in the metaverse. Consequently, your income is not considered assessable as ordinary income under section 6-5 of the ITAA 1997.

As a NFT is a capital gains tax (CGT) asset the proceeds from the sale of the NFT will be subject to CGT pursuant to section 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997.

Detailed reasoning

Carrying on a business of selling NFT's

The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 deals with the issues in determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is carrying on any type of business including property development.

Paragraph 13 of TR 97/11 states that the following indicators are relevant in determining whether a taxpayer is carrying on a business:

•         whether the activity has a significant commercial purpose or character;

•         whether there is repetition and regularity of the activity;

•         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;

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

•         the size, scale and permanency of the activity; and

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

Based on the factors of your situation, we have considered the following indicators:

Whether the activity has a significant commercial purpose or character

This indicator requires that you be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. You need to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

You started your activity to build a metaverse with the intention to be used for your friend's personal event. Your primary focus was to showcase the metaverse artwork rather than establishing a profit-seeking venture. You do not have a business plan which does not establish the act of carrying on a business. You did not have the intention to make any profit from the activity. This indicates that your selling of NFT lacks commercial purpose.

Whether the taxpayer has more than just an intention to engage in business

You had an intention to engage in your activities, but your focus was to post artistic idea to allow users to represent themselves through art which was going to be free. The idea was to make NFT free to anyone that wanted one. This indicates that you do not have an intention to engage in business.

Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Where a business trading in NFT exists, there is usually a business plan on how the activities will be conducted.

In your case, you did make a profit from selling the NFT, but your contention was that this activity would unlikely result in sales due to the small metaverse being free. This indicates that you do not have a purpose of profit as well as a prospect of profit from the activity.

Whether there is repetition and regularity of the activity

In the case of NFT trading, repetition and regularity are important indicators on whether a business is being carried on, with the size and scale of the activity being supporting factors.

You spent free time enjoying building the personal event themed metaverse. Since this event, you did not engage in further activities and have no intention to do this in the future.

The size, scale, and permanency of the activity

Sale of NFT that is being conducted for once only is more likely to be considered investing, however a NFT trader could trade with high regularity, while a share investor could have several million dollars at stake.

Since this event, you have no further additions to the metaverse. Your activity was conducted for recreation and for a personal event. There was no commercial purpose, you used metaverse for free without any expectation that it would generate any revenue or profit.

Whether the business is of the same kind that is being carried on in a similar manner to that of the ordinary trade in that line of business

Activities are more likely to be carrying on a business where they are carried on in a systematic and organised manner. This usually involves keeping appropriate business records and having a strategy in place to maximise your profits.

The following information indicates that you are not carrying out NFT trading activities in a similar manner to others in this industry:

•         You did not have any relevant training

•         You did not have a business plan in place.

•         You did not have any strategy in place.

•         You spent your free time sporadically enjoying building the metaverse.

•         You are a full-time student and using your time continuing the study.

Whether the activity is planned, organised, and carried out in a businesslike manner

Activities are more likely to amount to the carrying on a business where they are carried out in a systematic and organised manner. This usually involves some form of forward planning such as contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining, and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records.

You do not have a business plan and do not have knowledge and expertise in the area of the metaverse and cryptocurrency related markets. You didn't keep any records and no businesslike systems in place. You also didn't spend much time in this activity. This does not display the sophistication that may be expected of a NFT trading business.

Whether the activity would be better described as a hobby, recreational or sporting activity

You commenced this activity in your free time with the intention to showcase the metaverse artwork rather than establishing a profit-making venture. There was no intention to make a profit, it was merely a pursuit of a hobby for creation in a personal event.

Conclusion

After weighing the relevant business indicators against the information and documentation provided, it is the Commissioner's view that the overall impression is that you were not carrying on a business of trading in NFT. Your sale of NFT do not display the indicators of a business being carried on. Your activity lacked 'significant commercial purpose or character' i.e., limited time given to the activity and there was no business plan in existence.

Isolated transaction with a profit-making purpose

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether the profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 1 of TR 92/3 provides that the term isolated refers to:

•         those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

•         those transactions entered into by non-business taxpayers.

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

Paragraph 6 of TR 92/3 and also paragraphs 16 and 35 provide that a profit from an isolated transaction or operation is generally income when both of the following elements are present:

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

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

Whether an isolated transaction is business or commercial will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of the land can be assessed as ordinary income within section 6-5 of the ITAA 1997. Paragraph 13 of TR 92/3 lists the following factors as some of the matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction:

•         the nature of the entity undertaking the operation or transaction;

•         the nature and scale of other activities undertaken by the taxpayer;

•         the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

•         the nature, scale and complexity of the operation or transaction;

•         the manner in which the operation or transaction was entered into or carried out;

•         the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

•         if the transaction involves the acquisition and disposal of property, the nature of that property; and

•         the timing of the transaction or the various steps in the transaction.

Paragraph 36 of TR 92/3 states the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme.

At paragraph 41 the taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

Further at paragraph 43 if a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question.

In this case, in determining whether the sale of NFT would be viewed as a profit making undertaking, the following has been considered:

•         You did not carry on an isolated profit-making transaction in assessing intention or purpose. Your sole intention was to spend free time enjoying building the metaverse.

•         Your primary intention was to showcase the metaverse artwork rather than establishing a profit-seeking venture.

•         Your activities also did not amount to a business operation or commercial transaction. You undertook the activity for your friends personal event. You have had no further activities since then and have no intention to do this in the future.

•         You did not spend much time on the activity and it was only one event. You utilised free metaverse without any anticipation of generating any revenue or profit.

•         Although profit was made but you had no expectation of making any profit.

Based on the information provided and having regard to your circumstances, the income from the sale of the NFT was not derived due to an isolated profit-making transaction. Your sale of the NFT is not considered to be commercial in nature and you are not considered to be engaged in a profit-making undertaking. Your intention was to showcase the metaverse artwork rather than establishing a profit seeking venture.

Conclusion

As explained above the sale of the NFT is not considered to be a business operation or commercial transaction. As the NFT is a capital gains tax (CGT) asset the proceeds from the sale of the NFT would be subject to CGT pursuant to section 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997.