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Edited version of your written advice
Authorisation Number: 5010056207480
Ruling
Subject: Capital gain on the sale of NewCoint
Question 1
Is the acquisition date of the NewCoins issued to you via a “chain split” for the purposes of determining the ability to discount the Capital Gain on the sale of the NewCoin the date of purchase of the original coin?
Answer: No
Question 2
Is the cost base for the NewCoins sourced through “chain splits” $0 (Zero Dollar)?
Answer: Yes
This ruling applies for the following period:
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You invested in Cryptocurrency.
The majority of the Cryptocurrency you hold were acquired more than 12 months before the beginning of the XXXX financial year.
You hold all Cryptocurrency as an investment on capital account.
At numerous times throughout the years you received other types of Coins (NewCoin) through “chain splits” which have been issued to you in proportion to your Cryptocurrency holding.
You would not be receiving these NewCoins if you were not a holder of your Cryptocurrency.
You sold the NewCoins as soon as practicable following receipt and received Cryptocurrency as consideration.
You believe the acquisition date for the NewCoins should reflect the acquisition date for the underlying Cryptocurrency they relate to.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 104-155
Income Tax Assessment Act 1997 Subsection 109-5(1)
Income Tax Assessment Act 1997 Subsection 109-5(2)
Income Tax Assessment Act 1997 Subsection 110-25(2)
Income Tax Assessment Act 1997 Division 130
Income Tax Assessment Act 1997 Section 130-20
Income Tax Assessment Act 1997 Subsection 130-20(1)
Income Tax Assessment Act 1997 Paragraph 130-20(1)(b)
Income Tax Assessment Act 1997 Subsection 130-20(2)
Income Tax Assessment Act 1997 Section 995-1
Reasons for decision
Summary
If you hold cryptocurrency as an investment, and receive a new cryptocurrency - NewCoin, as a result of a “chain split” (such as Bitcoin Cash being received by Bitcoin holders), you do not derive ordinary income or make a capital gain at that time as a result of receiving the NewCoin.
The date you acquire the NewCoin is the date you become its owner.
If you hold the new cryptocurrency as an investment, you will make a capital gain when you dispose of it. For the purposes of working out your capital gain, the cost base of a NewCoin received as a result of a “chain split” is zero. If you hold the Newcoin as an investment for 12 months or more, you may be entitled to the Capital Gains Tax discount.
Example
Alex held 10 Bitcoin on 1 August 2017 as an investment, when Bitcoin Cash split from Bitcoin. Immediately after the chain split, Alex held 10 Bitcoin and 10 Bitcoin Cash. Alex does not derive ordinary income or make a capital gain as a result of the receipt.
On 25 September 2018, Alex sold the 10 Bitcoin Cash for $4,000. The cost base of the Bitcoin Cash was zero, Alex makes a capital gain of $4,000 in the 2017-18 income year from the sale of the Bitcoin Cash. Alex is entitled to a 50% CGT Discount as he has owned the Bitcoin Cash for over 12 months.
Detailed reasoning
TD 2014/25 – Income tax: Is bitcoin a ‘foreign currency’ for the purposes of Division 775 of the Income Tax Assessment Act 1997? Says that the Oxford Dictionary of English (3rd Ed) defines Bitcoin as:
a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank: bitcoin has become a hot commodity among speculators / If you want to buy something using bitcoin you need to make sure the seller accepts the cryptocurrency.
TD 2014/25, paragraph 8 says
“It (Bitcoin) is described by commentators as 'a virtual currency that essentially operates as online cash' and as a 'crypto-currency, designed to reinvent the way that money works'. Bitcoin operates as a decentralized peer-to-peer payments network whose implementation relies on the use of public-key cryptography to validate transactions involving existing bitcoin and in doing so generates new bitcoin. The Bitcoin system is decentralized in that it is not under the control of a central authority. Transactions on the Bitcoin network are denominated in bitcoin. The value of bitcoin is 'not derived from gold or government fiat, but from the value that people assign it'.
Paragraph 8 (b) of TD 2014/26 says that Bitcoin is a bundle of rights ascribed to a person with access to the bitcoin under the Bitcoin software and by the community of Bitcoin users.
TD 2014/26 applies to bitcoin and cryptocurrencies like bitcoin.
“Chain Split”
A “chain split” involves a change in the software (consensus rules) that is significant enough to create two incompatible block chains.
As a general proposition, if one of the post “chain split” has the same core consensus rules as the original chain, then it is a continuation of the original chain. As the original cryptocurrency has not changed the cost base of it is unaffected.
Where after a “chain split”, the original block chain continues (and thus the original cryptocurrency continues), and a new block chain is formed, a NewCoin is created.
The general rule is that a taxpayer acquires a CGT asset when the taxpayer becomes its owner (subsection 109-5(1) of the ITAA 1997). Specific rules in subsection 109-5(2) of the ITAA 1997 sets out the time that a CGT asset is acquired as a result of a CGT event happening.
Broadly, the time of acquisition mirrors the time when an event happened or the taxpayer becomes the owner.
In the case of a “chain split”, you become the owner when you take receipt of the NewCoin.
Where the taxpayer does not receive the payment to give up any part of the original property, Section 110-25 of the ITAA 1997 holds that first element of the asset’s cost base will be zero.
In this case your ownership of the original cryptocurrency remains untouched.
As you did not pay any money or give any property to acquire the Newcoin, the first element of the asset’s cost base will be zero.
If you hold cryptocurrency as an investment, and receive a Newcoin as a result of a “chain split” (such as Bitcoin Cash being received by Bitcoin holders), you do not derive ordinary income or make a capital gain at that time as a result of receiving the NewCoin.