Edited version of private advice

Authorisation Number: 1052399541561

Date of advice: 23 May 2025

Ruling

Subject: CGT - cryptocurrency

Question 1

Does a CGT event under section 104-5 of the Income Tax Assessment Act 1997 (ITAA 1997) happen at the time the loan of the cryptocurrency is made?

Answer 1

Yes

Question 2

Does a CGT event under section 104-5 of the ITAA 1997 happen at the time the cryptocurrency is repaid?

Answer 2

Yes

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

The Lender proposes to lend 1 cryptocurrency to the Borrower.

The Lender acquired the cryptocurrency as an investment.

The Lender is in possession of the private key to the wallet which contains the cryptocurrency.

The proposed loan will be made based on the terms within the Loan Agreement.

Once the loan is made, the Borrower will take possession of the private key and transfer the cryptocurrency to an exchange.

The Borrower will be able to deal with the cryptocurrency as it sees fit, the only requirement is that they repay the cryptocurrency in accordance with the Loan Agreement.

The Borrower will dispose of the borrowed cryptocurrency, apply the proceeds to its working and trading capital, and ensure it repays the cryptocurrency in accordance with the Loan Agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 116-20

Question 1

Summary

A CGT event (CGT event A1) under section 104-5 will happen at the time the loan of the cryptocurrency is made, and The Lender will be liable for the capital gain or loss.

Detailed reasoning

Section 102-20 provides that you make a capital gain or capital loss at the time of the CGT event.

Section 108-5 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. CGT assets include part of an interest in property or a legal or equitable right that is not property.

Taxation Determination TD 2014/26 Income tax: is cryptocurrency a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997? provides that cryptocurrency holding rights amount to property within the meaning of paragraph 108-5(1)(a). As such, a person holding a cryptocurrency is considered to hold a 'CGT asset' for the purposes of that provision (paragraph 12 of TD 2014/26).

CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner (subsection 104-10(2)).

Subsection 104-10(3) provides that the time of CGT event A1 is when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs.

Where you dispose of cryptocurrency, paragraph 15 of TD 2014/26 confirms that you make a capital gain from CGT event A1 if the capital proceeds from the disposal of the cryptocurrency are more than the cryptocurrency's cost base. You make will make a capital loss if the capital proceeds are less than the cryptocurrency's reduced cost base.

The capital proceeds from the disposal of the cryptocurrency are, in accordance with paragraph 116-20(1), the money or the market value of any other property you received (or you are entitled to be received) in respect of the disposal.

However, the capital proceeds will be replaced with the market value of the cryptocurrency as at the time of the disposal under section 116-30 if:

(a)          no capital proceeds are received for the disposal

(b)          some or all of the capital proceeds from a CGT event cannot be valued, or

(c)           the capital proceeds are more or less than the market value of the asset and the parties engaged in a non-arm's length dealing in connection with the CGT event.

The money paid or the market value of any other property you gave in respect of acquiring the cryptocurrency will be included in the cost base of the cryptocurrency in accordance with subsection 110-25(2).

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 agreement to transfer the cryptocurrency to the Borrower, all legal and beneficial right, title, interest, and risk will be transferred to the Borrower. The Borrower will take possession of the private key and transfer the cryptocurrency to an exchange. The borrower will then dispose of the cryptocurrency and apply the proceeds towards its working and trading capital. Once the Borrower takes possession of the private key, they will have capacity to deal with the Cryptocurrency as they see fit with the only condition being that they repay a cryptocurrency to the Lender according to the terms of the Loan Agreement.

Therefore, the Borrower will have the legal and equitable interest over the cryptocurrency at the time the loan is made and The Lender will dispose the cryptocurrency to the Borrower at this time. Accordingly, CGT event A1 under section 104-10 will happen at the time The Lender enters into the Loan Agreement.

As The Lender acquired the cryptocurrency as an investment, he will make a capital gain or loss from CGT event A1, depending on the cost base of the cryptocurrency and the capital proceeds he receives from transferring the cryptocurrency to the Borrower.

In accordance with the Loan Agreement, The Lender will not receive any capital proceeds for the transfer of cryptocurrency to the Borrower. Therefore, the capital proceeds that The Lender will receive from CGT event A1 will be equal to the market value of the cryptocurrency at the time of the event in accordance with section 116-30. The cost base of the cryptocurrency will generally be the amount of money that The Lender paid to acquire the cryptocurrency.

To work out the value of the cryptocurrency, The Lender will need to convert its value to Australian dollars in accordance with the exchange rates from the Reserve Bank of Australia. If The Lender uses a foreign exchange rate for currency not listed, he may use any reasonable externally sourced exchange rate for that currency.

Question 2

Summary

A CGT event (CGT event C2) under section 104-5 will happen at the time the loan is repaid, and The Lender will be liable for any capital gain or loss.

Detailed reasoning

Section 104-25 states that CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered, or forfeited.

The timing of the event is when you enter into the contract that results in the asset ending, or if there is no contract - when the asset ends as per subsection 104-25(2).

Under subsection 104-25(3) of the ITAA 1997, you make a capital gain from CGT event C2 if the capital proceeds from the asset ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

The capital proceeds from a CGT event are the total of the money or the market value of any other property you received (or you are entitled to receive) in respect of the disposal of the asset under section 116-20. The money paid or the market value of any other property you gave in respect of acquiring the asset will be included in the asset's cost base in accordance with subsection 110-25(2).

Application to your circumstances

The examples listed in the definition of a CGT asset in section 108-5 includes debts owed to you. The Lender's contractual right to receive cryptocurrency at a future time according to the Loan Agreement, is the relevant CGT asset within the meaning of section 108-5. The Lender acquired this CGT asset when he loaned the cryptocurrency to the Borrower.

At the time The Lender receives the cryptocurrency from the Borrower, The Lender's contractual right to receive the cryptocurrency has been satisfied and CGT event C2 occurs pursuant to section 104-25.

The Lender will make a capital gain or loss from CGT event C2, depending on the cost base of the right to receive the cryptocurrency when it is lent under the Loan Agreement and the capital proceeds received when that right is satisfied.

The cost base of the right in this instance will be the market value of the cryptocurrency at the time the loan was made, and the capital proceeds will be the market value of the cryptocurrency at the time of repayment to The Lender.

Therefore, a CGT event (CGT event C2) under section 104-5 will happen at the time the loan is repaid, and The Lender will be liable for any capital gain or loss.