Edited version of private advice

Authorisation Number: 1052319758011

Date of advice: 24 October 2024

Ruling

Subject: CGT - cryptocurrency

Question

Will CGT event A1 occur on disposal of cryptocurrency asset under section 104-5 of the Income Tax assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

DD MM YY

The scheme commenced on:

DD MM YY

Relevant facts and circumstances

In MM YY, you purchased Crypto assets on behalf of your friend due to security reasons and your experience with buying and selling the assets. You were not a financial advisor and the transaction was a favour to your friend.

Your friend transferred funds from their personal bank account to your personal bank account. You then purchased Crypto assets and transferred the assets to your personal wallet.

You had no financial stake in the purchase and sale of the Crypto assets.

In MM YY, your friend requested you to sell the Crypto assets and transfer the holdings to them.

On DD MM YY, the final sale of the assets was made and a total funds was received.

On the DD MM YY, the funds were deposited into your bank account from Crypto platform.

On the following dates you transferred funds to your friend:

DD MM YY

DD MM YY

DD MM YY

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

Summary

As you held equitable and legal interest in the crypto asset when it was disposed of, you will be liable for any capital gain or loss on the disposal of the asset.

Detailed reasoning

If there is a CGT event, you may make either a capital gain or capital loss on the disposal of the crypto asset. If you make a capital gain, you may pay tax on it.

A transaction involving a disposal takes place when you do any of the following:

•                     sell a crypto asset

•                     gift a crypto asset

•                     trade, exchange or swap a crypto asset for another crypto asset

•                     convert a crypto asset to Australian or foreign currency (otherwise known as 'fiat currency')

•                     buy goods or services with a crypto asset.

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss at the time of the CGT event.

Subsection 104-10 of the ITAA 1997 states, that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity. However, a change in ownership does occur if you stop being the legal owner but continue to be the beneficial owner.

Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

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, express's the Commissioners opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. We refer to the following paragraphs:

12. In weighing all these factors it is considered that Bitcoin holding rights amount to property within the meaning of paragraph 108-5(1)(a). As such, a person holding a bitcoin is considered to hold a 'CGT asset' for the purposes of that provision.

13. Apart from a dealing in individual bitcoin it is possible for there to be a dealing relating to the Bitcoin wallet (which would necessarily be a dealing in each and every bitcoin in the wallet and the private key), or just in the private key. Rights may exist in relation to either. Bitcoin wallet rights are essentially the same as the Bitcoin holding rights but represent a more extensive interest, the whole (the wallet) including the lesser (individual bitcoin). Rights in the private key would fall short of 'property' for the purposes of paragraph 108-5(1)(a). However, the law of confidential information would point to the existence of an equitable right in relation to the private key, enforceable by a court, which would then give rise to a CGT asset for the purposes of paragraph 108-5(1)(b).[15]Dealings in relation to either the wallet or the private key are therefore capable of amounting to CGT events that happen to CGT assets.

CGT consequences of disposing of bitcoin

15. The disposal of bitcoin to a third party gives rise to CGT event A1 under subsection 104-10(1). A taxpayer will make a capital gain from CGT event A1 if the capital proceeds from the disposal of the bitcoin are more than the bitcoin's cost base. The capital proceeds from the disposal of the bitcoin are, in accordance with subsection 116-20(1), the money or the market value of any other property received (or entitled to be received) by the taxpayer in respect of the disposal. The money paid or the market value of any other property the taxpayer gave in respect of acquiring the bitcoin will be included in the cost base of the bitcoin in accordance with subsection 110-25(2).

16. However, section 118-20 reduces any capital gain made by a taxpayer by an amount that is included in the taxpayer's assessable income under another provision of the tax law, for example, ordinary income under section 6-5.

Legal versus equitable right

When considering the disposal of an interest in a CGT asset, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or equitable interest owner of the asset. Generally, an equitable interest is an interest or right a person holds because they have a lawful or legitimate interest in the property or equitable title. The Commissioner considers in very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

Application to your circumstances

Upon initiation of the transfer to obtain the crypto assets on behalf of your friend. All legal and beneficial right, title, interest and risk were transferred to your private key in the form of a personal wallet. All your credentials including personal bank account were used when dealing with the crypto assets over the 7 year period. You were liable for all associated risks when making the transactions on behalf of your friend. You made the decisions of when the crypto was disposed of and on disposal, the gain was transferred to your personal account in which you controlled the transfer of the funds.

Without a formal agreement or accounting records supporting these transactions were made in good faith to assist your friend, the Commissioner does not have sufficient evidence to establish the equitable right differs from the legal owner.

Therefore, as you have the legal and equitable interest over the crypto asset, CGT event A1 occurred on disposal. You will be liable for the capital gain or loss and liability for the CGT payable.