Edited version of private advice

Authorisation Number: 5010060075585

Date of advice: 28 June 2019

Ruling

Subject: Cryptocurrency - personal use

Question 1: Is the sale of your acquired CRA assessable as ordinary income under section 6-5 of the ITAA 1997 due to the carrying on of a business?

Answer:

No

Question 2: Do any of your activities amount to a profit-making undertaking or plan pursuant to section 15-15 of the ITAA 1997?

Answer:

No

Question 3: Are your CRA considered CGT assets pursuant to subsection 108-5(1) of the ITAA 1997?

Answer:

Yes

Question 4: Are your CRA personal use assets, pursuant to subsection 108-20(2) of the ITAA 1997?

Answer:

No

Question 5: Will any capital gain made by you, on the disposal of the CRA, where the first element of the cost base of the item does not exceed $10,000, be disregarded under subsection 118-10(3) of the ITAA 1997?

Answer:

No

Relevant facts and circumstances

You are a resident of Australia for tax purposes.

You watched media content which regularly requested donations to continue making episodes.

On 20XX you discovered you could donate to the media content via Cryptocurrency A (CRA).

This made you aware and interested in CRA.

You joined an online web-forum devoted to discussing CRA.

On online web-forum you learned about mining.

In 20XX you started mining CRA.

Your intent in undertaking mining was solely to provide donations to the media content.

You had no business plan and sought no professional or expert advice.

You received X CRA between 20XX and 20XX.

To you, at this point in time mining was a hobby to help you with a medical condition.

You made various disposals of X CRA from 20XX - 20XX.

You purchased X CRA in 20XX

You transferred your CRA to your private wallet, as you thought that the exchange site did not seem reputable and did not consider it a serious place to keep your CRA.

You continued to mine up until 20XX.

You stopped mining as it now requires expensive mining equipment and you no longer enjoyed or derived fulfilment in the mining.

You kept up to date on CRA and were aware of general events that occurred with CRA.

You were aware of a proposed chainsplit of CRA.

You no longer wished to support the CRA.

You were no longer interested in CRA.

In XXXX you disposed of XXX CRA for XXX Cryptocurrency B ()

Relevant legislative provisions

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 108-20

Income Tax Assessment Act 1997 section 108-20(2)(b)

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 118-10

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

Question 1: Is the sale of your acquired CRA assessable as ordinary income under section 6-5 of the ITAA 1997 due to the carrying on of a business?

Summary:

No, Your CRA and CRB would be treated as capital gains tax (CGT) assets with any gains from the disposal of the Cryptocurrency included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals would be capital losses (section 102-10 of the ITAA 1997).

Detailed Reasoning:

Taxation legislation defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree and is determined on a year by year basis. If your activities do not amount to the carrying on of a business in one income year, that will not prevent them doing so in a later income year. Similarly, when the extent of an activity falls below what is required for that activity to be commercially viable, the activity may no longer constitute the carrying on of a business.

Generally, where you carry out business activities for the purpose of earning income from buying and selling Cryptocurrency you are considered to be in the business of Cryptocurrency trading - similar to the conditions that apply between being a share investor and a share trader. Your Cryptocurrency are treated as trading stock with the income from your sales included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), and the expenses incurred to acquire the Cryptocurrency are deductible under section 8-1 of the ITAA 1997. Other expenses incurred in the course of carrying on the business would also be deductible under relevant provisions of the Income Tax Assessment Act 1936 or the ITAA 1997.

However, as with shares, if your Cryptocurrency activities are insufficient to be carrying on a business you will be regarded as an investor. Your Cryptocurrency would be treated as capital gains tax (CGT) assets with any gains from the disposal of the Cryptocurrency included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals would be capital losses (section 102-10 of the ITAA 1997).

The Commissioner's view is contained in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? which lists the factors that are considered important in determining the question of business activity:

● 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 regularity and repetition of the activity

● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Overall the factors point to your sales and purchases of Cryptocurrency not being made as part of the carrying on of a business. While your activity selling CRA and purchasing CRB has a commercial size and quantity and you have made a profit from the CRA and will make a profit from the sale of the CRB it is not enough to suggest that you are in business.

The prospect and purpose of profit are only two of the distinguishing factors between hobby, investment and business. A number of transactions over a small period of time does not constitute a regularity and repetition of activity. While you activity has some elements of planning and organisation, your record keeping is not of a sufficient businesslike manner. It is not your intention to engage in business.

These factors suggest that both your CRA and CRB purchases and sales would not be considered to be business activities. However, they are not considered a hobby and do constitute investment activities. Your CRA and CRB would be treated as capital gains tax (CGT) assets with any gains from the disposal of the Cryptocurrency included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals would be capital losses (section 102-10 of the ITAA 1997).

Question 2: Do any of your activities amount to a profit-making undertaking or plan pursuant to section 15-15 of the ITAA 1997?

Summary:

No

It is clear that you have and are taking steps to protect your investment. However, the decision in Grieg v FC of T 2018 ATC shows that the mere fact that you are holding capital assets to make a profit is not sufficient to be a profit making intention. In your case your subsequent investment into CRB, although a considerable amount, is not a commercial transaction and the research and informed decision making steps you have taken to protect your capital investment is consistent with an investor.

Your initial investment into CRA does not constitute a commercial transaction and as such it is not a profit-making undertaking.

An amount, which is not assessable under section 6-5 of the ITAA 1997, may be assessable under section 15-15 of the ITAA 1997 (a rewritten section 25A of the Income Tax Assessment Act 1936). This is if the profit arises from the carrying on or carrying out of a profit-making undertaking or plan.

Therefore it is necessary to consider whether the sale of acquired CRA would be part of a profit-making undertaking or plan.

It is well established that where a taxpayer enters into an isolated business transaction with an intention to make a profit or gain, the profit or gain will be ordinary income even if the transaction was extraordinary when judged by reference to the ordinary course of the taxpayer's business (FC of T v The Myer Emporium Ltd 87 ATC 4363). Similarly, if the taxpayer's intention or purpose was to make a profit or gain but a loss was ultimately sustained, the loss is deductible (Visy Packaging Holdings Pty Ltd & Ors v FC of T 2012 ATC), as long as the loss was incurred in carrying on a business or in a " business operation or commercial transaction " of a kind contemplated by the Myer principle (Grieg v FC of T 2018 ATC).

Guidance in determining whether profits from isolated transactions are ordinary income and the ATO view as to the application of the decision in Myer is provided in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income.

Taxation Ruling TR 92/3 provides guidance in determining whether profits from isolated transactions are income and therefore assessable pursuant to section 6-5 of the ITAA 1997. Profit from an isolated transaction is generally income when both of the following elements are present:

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

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

The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Whether a transaction has a business or commercial character depends on the circumstances of the case: Myer

In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operation.

The taxpayer's losses from share transactions in Greig v FC of T 2018 ATC 20-662 were held not to be deductible as they were not incurred in carrying on a business or in a " business operation or commercial transaction " of a kind contemplated by the Myer principle. In Greig, the taxpayer held various managerial and senior executive roles within the Bechtel Group of companies from April 1981 until his retirement in May 2015. His financial position was such that, between January 2008 and April 2014, he expended many millions of dollars on share purchases, including shares in the ill-fated Nexus Energy Ltd.

The Court found that the Nexus shares were not acquired as part of a "business operation or commercial transaction" within the Myer principle; the share losses were not "incurred in gaining or producing assessable income " and were thus not deductible. Justice Thawley said it was to be accepted that the relevant profit-making purpose was present. Each parcel of Nexus shares was acquired with the desire that they go up in value and be sold for a profit. That hope or expectation did not make the purchase of the shares a "business operation or commercial transaction ". There was nothing in the nature of business or commerce that the taxpayer proposed to carry on when he acquired the first parcel of Nexus shares, and his increased monitoring and research was entirely consistent with the steps one would expect of an investor seeking to protect his substantial capital investment, rather than one implementing a " commercial dealing " or business operation.

It is clear that you have and are taking steps to protect your investment. However, the Greig case shows that the mere factor that you are holding capital assets to make a profit is not sufficient to be a profit making intention. In your case your subsequent investment into CRB, although a considerable amount, is not a commercial transaction and the research and informed decision making steps you have taken to protect your capital investment is consistent with an investor.

Your initial investment into CRA does not constitute a commercial transaction.

Neither your CRA nor CRB are considered to be part of a profit-making undertaking.

Question 3: Are your CRA considered CGT assets pursuant to subsection 108-5(1) of the ITAA 1997?

Answer:

Yes

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 (ITAA 1997)? (TD 2014/26) paragraph 1 states that bitcoin is a CGT asset for the purposes of subsection 108-5(1) of the ITAA

1997.

ATO guidance paper "Tax treatment of crypto-currencies in Australia - specifically bitcoin" confirms

that the tax treatment of bitcoin can be applied to other crypto or digital currencies that have the same characteristics as bitcoin.

Question 4: Are your CRA personal use assets, pursuant to subsection 108-20(2) of the ITAA 1997?

Answer:

No

Summary

Your CRA are not personal use assets in accordance with subsection 108-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

Based on the facts provided and circumstances as described the Commissioner is of the opinion that your CRB are not personal use assets and will be subject to capital gain tax.

Detailed reasoning

Cryptocurrency

Cryptocurrency is only capable of being acquired, held and transacted with. Both the period of holding and the nature of the subsequent transaction will be relevant to whether your cryptocurrency is a personal use asset. The relevant time for determining whether or not an intangible asset is a personal use asset is at the time of its disposal.

Personal use assets

Section 108-20 of the Income Tax Assessment Act 1997 (TAA 1997) says that personal use assets are Capital Gains Tax (CGT) assets, other than collectables, that are used or kept mainly for the personal use or enjoyment of you or your associates. Subsection 108-20(2)(b) of the ITAA 1997 says that a personal use asset can include an option or right to purchase a CGT asset of that kind -meaning a right to purchase a personal use asset.

When the CGT provisions of the Income Tax Assessment Act 1936 (ITAA 1936) were enacted, the following kinds of property were given as being examples of personal use assets - clothing, white goods, furniture, sporting equipment, cameras and boats.

Mainly used or kept

The Australian Taxation Office Interpretive decision ATO ID 2002/795 - Are unused marble floor tiles 'personal use assets' as defined in subsection 108-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? states it does not matter if the assets are actually used for the purpose for which they had acquired, it is the intent of the purchase and the purpose for which an asset is mainly kept that is key to if an asset is a "personal use" asset.

The definition of mainly is predominantly, chiefly, principally, or for the most part (ATO ID 2002/795).

ATO ID 2011/37- Income Tax: CGT small business concessions: maximum net asset value test - disregarded assets - asset being used solely for personal use and enjoyment explains that the entire ownership period is taken into account and if regard was had only to an asset's use at a single point in time, the result would not necessarily reflect the true nature of the use of the asset.

Personal use or Enjoyment

An asset has to provide an individual with a source of pleasure or relate directly to that individual to be a "personal use" asset.

An asset cannot be a personal use asset if it is mainly acquired, kept or used as an investment, as part of a business or for a profit-making purpose. The two categories are mutually exclusive.

Where an individual keeps cryptocurrency for a number of years with the intention of selling them at opportune times based on favourable rates of exchange this is not personal use.

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? confirms that Bitcoin that is kept or used mainly to make purchases of items for personal use or consumption ordinarily will be kept or used mainly for personal use. However if the bitcoin were instead purchased to facilitate the purchase of income producing income producing investments, they would not be personal use assets.

ITAA 1997 does not provide a definition of investment, however, generally it's the allocation of a resource (money) in the expectation of some benefit in the future.

In Favaro's case (Favaro v FC of T 96 ATC 4975), Italian currency, which was converted to Australian currency and invested, was held not to be a personal use asset (under section 160B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)). In this case a significant portion of the currency was seen to be invested. It was held that the purpose of holding the currency was that it was to be exchanged for Australian currency at a favourable rate and therefore was not personal use.

Intangible Assets

The definition of personal use includes the right or option of the Taxpayer to acquire a CGT asset that would be a personal use asset.

In most cases, an intangible asset would not be considered to be a personal use asset. An exception to this may be where an intangible asset is used to directly acquire an asset held mainly for personal use and enjoyment. That is, the intangible asset can take on the character of another asset.

For example, where you are provided an option to purchase a boat for personal use; the option would itself be an intangible personal use asset. TD 2014/26 states where an individual taxpayer purchased bitcoin from a Bitcoin exchange and uses the bitcoin to make online purchases for their personal needs, for example clothing or music, that would be considered to be a personal use asset.

Tangible Assets

Where an asset is a commodity, or is required to be converted to funds to be used these are indicators that the asset is not a personal use asset.

In both ATO ID 2002/795 and ATO ID 2003/451 CGT: personal use assets - gold nuggets the assets can be used for personal enjoyment without the conversion into currency. The assets in these examples are individual physical products - They can be seen, held, touched and provide enjoyment in their natural state.

Investment

TD 2014/26 goes on to say that bitcoin that is kept or used mainly for the purpose of profit-making or investment, or to facilitate purchases or sales in the course of carrying on business is not used or kept mainly for personal use. Further, the inherent nature of bitcoin means that it is generally either used as a means of exchanging it for something of value, or it is kept as a speculative investment.

Disposal

We take into account the nature of the property acquired when the bitcoin is disposed of (for example, whether the bitcoin is used to purchase an investment) when considering if bitcoin is a personal use asset (TD 2014/26).

If you have to exchange a cryptocurrency you own to Australian dollars (or to a different cryptocurrency) to purchase or acquire the items for personal use or consumption, then this strongly indicates the cryptocurrency you own was acquired, held and used for a purpose other than personal use or enjoyment.

Mining Cryptocurrency

Paragraph 24 of Taxation Determination TD 2014/26 states that where a taxpayer mines a small amount of bitcoin as a hobby and after two years decides to sell the bitcoin for a small profit in order to purchase a more stable investment item, the gain will be assessed under the CGT provisions, not as ordinary income. Further, as the bitcoin were used to purchase an investment, the capital gain will not be disregarded under subsection 108-20 of the ITAA 1997 because the bitcoin will not be personal use assets.

Therefore when we consider personal use of an asset we consider the following aspects:-

·   the initial intention,

·   the use and intention during the period owned,

·   the length of time the asset was owned, and

·   the subsequent disposal.

Initial intention

In your case you became aware and interested in CRA through viewing media content, and donated CRA to them. You also learnt about mining and initially started mining in 20XX. You consider the mining a hobby (evidenced further by stopping mining when further investment was required to maintain your hobby).

You purchased larger quantities of CRA from an exchange.

Use and intention during the ownership period

Whilst the initial intent may not have been for a speculative investment it does not follow that, after the first year speculative investment has not occurred.

During the period of ownership the CRA increased in value. CRA was openly discussed in the media and you were fully aware of the increase in value during the period you held the asset. You have also expressed that you kept up to date on CRA and were aware of the general events that occurred with CRA.

Length of time asset owned

The longer the period of time that a cryptocurrency is held, the less likely it is that it will be a personal use asset. You held the CRA from 20XX to 20XX.

Disposal

Generally the relevant time for determining whether or not an asset is a personal use asset is at the time of its disposal.

You converted CRA to CRB, near the height of CRA value. You were aware of a possible chain split. You no longer wished to support CRA. You had researched CRA and were informed about the CRA market.

These are all indicators that the CRA was not a personal use asset. Further, where you exchange your CRA to a different cryptocurrency (CRB) this strongly indicates the cryptocurrency you own was acquired, held and used for a purpose other than personal use or enjoyment.

The acquisition of CRB and the intent of use of the CRB platform generally would not be seen as a private or personal activity.

Cryptocurrency may be held for either investment or trading purposes, and profits on sale are earned in either case. A person who invests in cryptocurrency, particularly since 2014, generally does so with the intention of earning gains but is not necessarily carrying on business activities. One of the factors of deciding if you are investing or a hobby is the size and scale of the activity. We consider the volume and value of the CRB purchased is a material amount and therefore is an investment.

Further, CRA and CRB are intangible assets; they are a digital representation of value and a bundle of rights (TD 2014/26). Generally intangible assets are not considered to be personal use assets. An exception to this may be where an intangible asset is used to directly acquire an asset held mainly for personal use and enjoyment.

You have not used your CRA or CRB to directly purchase online products for your personal needs, such as clothing or music.

Further, if we consider it from the point in time where you received or purchased the CRA, the most prolific function of the CRA was the rise in value.

Given the inherent nature of both CRA and CRB is that it is either used as a means of exchanging it for something of value, (to facilitate smart contracts) or it is kept as an investment; the timing and quantity purchased, and, the fact that the you have held on to them demonstrates that you have not used them mainly for personal use.

The CRA and CRB are not personal use assets.

Note: As you have held the assets for more than 12 months you can use the discount method when calculating your capital gain.

Question 5: Will any capital gain made by the taxpayer, on the disposal of the CRA, where the first element of the cost base of the item does not exceed $10,000, be disregarded under subsection 118-10(3) of the ITAA 1997?

Answer

No

Neither your CRA or your CRB are personal use assets, therefore, subsection 118-10(3) of the ITAA 1997 does not apply.