Edited version of private advice

Authorisation Number: 1052238344888

Date of advice: 8 April 2024

Ruling

Subject: Non-commercial losses - cryptocurrency

Question 1

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include the loss from your activity in the calculation of your taxable income for the financial year ended 30 June 20YY?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You work in a management position in which you review financial information.

You started a cryptocurrency activity using different platforms. You chose to invest in cryptocurrency rather than traditional investment options (shares) due to the profitability that can occur within a rising or declining market. Compared to traditional investments that are being affected by the economic growth and high inflation.

Over the period of a week, you spent approximately 10 hours either actively trading or researching.

Before starting you had over two decades of experience in share trading and investment in managed funds.

During the 20YY-YY financial year you undertook training with a focus on the cryptocurrency and trading. You also sought guidance from friends who have trading experience.

You keep records related to the trading. Your records have been portioned out to relate to the trading activity and all data/records are identifiable and labelled.

Your trading strategy is that you use Contract for Differences (CFD) to profit from the price movement from when the contract opens and closes. For these trades to occur you use technical analysis and fundamental analysis to predict the future direction of the market, focusing more on a technical analysis. The fundamental part is looking at external factors such as: announcements, news, and market reaction. The technical analysis is the prediction of future direction of the market through analysing historical data, support and resistance levels of the asset for any possible reactions.

When starting a new trade, you take into consideration capital/funds along with risk that you are willing to take and repeat this on a regular basis to make short term profit. The use of the CFD allows for profit gain whether the asset rises or falls. As the contract allows for a buy position if there is a potential increase and the closing of contract on the decline.

As part of your trading strategy to manage risk and losses you maintained sensible trade sized position and stop losses. For your trade position you chose how much capital to devote to trading and limit the trading capital in one CFD to an amount that could be loss if required. This allows for trading without pressure and have consistent returns and stay in the market rather than lose it all. Your trading size is small capital and is based on market volatility and interpretation of the assessed risk.

You also implement stop losses in your trading strategy, this involves balancing risk and reward based on the previous trading day. You review the support and resistance levels of the asset and depending on the movement of the asset will determine if you buy or sell the asset.

Over the 20YY-YY financial year you have made several transactions between the trading platforms within the second half of the financial year. These transactions either occurred consecutively for a period of days or were infrequent during this time frame.

During the 20YY-YY financial year you invested over half a million dollars between the platforms, with the funds being invested as required between the platforms. To be able to invest this amount of money you had several sources of funds including personal savings and loans. From this investment you have received combined income and trading stock of less than $xxx.

You have made several requests from all trading platforms to withdraw your funds and all platforms have made the withdrawing process complicated or refused to release the funds. For one of the platforms, when you made the request to withdraw the platform would request additional funds to be deposited. If you deposited the funds and made the request to withdraw you would still be refused. The other platforms have either rejected the withdrawal request by stating insufficient funds or have frozen/closed the account.

You have a bank account that has received one withdrawal from one of the platforms. You had multiple withdrawals from another of the platforms via a digital payment method, however, after these withdrawals the platform has disallowed/rejected the further requests leading to a loss of capital of just over US$xxx. You have also obtained verification about the previous withdrawals via the digital payment method and have been advised by authorities it does not exist. You have been in contact with the bank and the digital payment method to request a dispute and reversal of the deposit paid into the trading platforms but was unsuccessful.

Following this you have reported one of the platforms to the Australian Competition and Consumer Commission Scamwatch. You have proceeded to lodge police reports on the trading platforms.

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)(a)

Question 1

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the (ITAA 1997) to allow you to include the loss from your activity in the calculation of your taxable income for the financial year ended 30 June 20YY?

Summary

The Commissioner will not exercise the discretion as you were not in business in the relevant year.

Reasons for decision

Division 35 applies to defer losses from non-commercial business activities unless:

•         you satisfy the income requirement in subsection 35-10(2E) and one of the four tests referred to in subparagraphs 35-10(1)(a)(i) to (iv)

•         the exception in subsection 35-10(4) applies, or

•         the Commissioner exercises the discretion in subsection 35-55(1).

•         In your case, as your income was above $250,000, you do not satisfy the income requirement contained in subsection 35-10(2E) of the ITAA 1997.

Your losses are subject to the deferral rule unless the Commissioner exercises his discretion under section 35-55 of the ITAA 1997.

In your situation it would need to be determine if the transactions were an ordinary incident of carrying on a business and if so, if the Commissioner's discretion for special circumstances could be applied.

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:

•         Whether the activity has a significant commercial purpose or character.

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

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

•         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.

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). Repetition and regularity are important indicators on whether a business is being carried on, along with the size and scale of the activity being supporting factors.

Your activity was conducted over a number of consecutive days during the 6 months. Outside of the pattern of trading for approximately 3 days per month, there appears to be no regularity or repetition to the days traded and quantity of trades completed, along with just under half of the trades occurring within one month. You completed less than 120 transactions over the relevant financial year. This is not considered to be a high level of transactions and is not in keeping with the number that would be expected of a person who was carrying on a business. Although you had reasonably sized buy/sell transactions, the number of transactions completed for the financial year has limited the size and scale of the trading activity. The information provided indicates that the transactions were speculative and entered into sporadically.

You underwent education by completing courses focused on cryptocurrency along with research on the market and expected trends, however, your trading strategy and strategy to preserve capital did not display the sophistication that may be expected of a business. You were also engaged in another full-time occupation during the relevant financial year.

In your circumstances when you started on the platforms, it was a decision made to achieve high returns in a short period of time. This can be seen in the transaction data provided that shows buy/sell occurring on the same day with a high-income increase. You have also chosen these trading platforms based on advice and research provided to you and conducted by yourself, with the full intention of running a business. You implemented stop losses in your trading strategy.

You entered into this activity with the purpose to make a profit or potential profit, based on research that you conducted. To finance the activity a total of over half a million dollars was invested. Over the period there was income generated to be over half of what was originally invested. To receive the payment from one of the platforms each time additional funds would need to be paid, sometimes multiple times before income was made. The ability to withdraw the funds has been affected by the trading platforms disallowing the release of the funds and access to the accounts. The disallowing of funds does affect the prospect of profit as the funds are not able to be used for reinvestment or release to improve other areas of the activity.

It is acknowledged that the activity undertaken had a profit purpose. There are some characteristics that aligned the activities to those associated with carrying on a business.

However, the activities also lacked indicators of a 'significant commercial purpose or character'. That is, there was no business premises, no staff, limited time given to the activity, no plan to expand the activities, no intention to continue beyond achieving a wealth goal, and no design or purchase of customised market analysis tools. Overall you have made a loss over the 6 months of the activity, including a substantial loss from one of the platforms, as you have not received any return from it.

All the indicia summarised in TR 97/11 have been considered. No one indicator is decisive. The indicators have been considered in combination and as a whole. At present, it is not considered that your activity has the size, scale and permanency of a business. Based on the information that has been provided there was no business activity being performed in the 20YY-YY financial year.

As you were not in business you do not meet the requirements in Division 35 of the ITAA 1997 to be considered for the Commissioner's discretion to claim the losses.

If your activity changes you may reassess whether you are in business.