Are the proceeds from the cryptocurrency transactions assessable as income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No. This ruling applies for the following periods : Year ended 30 June 2022 Year ended 30 June 2023 The scheme commenced on: 1 July 2022
You are working full time. You use an Australian based crypto focused exchange company, which offers a variety of cryptocurrency. You have bought a variety of cryptocurrency. For the 2021-22 financial year you made several buy transactions and sold around half of what was purchased. In the 2022-23 financial year there was a significant change resulting in less buy transactions and almost all purchases being sold. To finance this activity in cryptocurrency you used funds from an inheritance and refinanced property to obtain funds. You deposited funds at regular intervals in the 2021-22 financial year and made minimal deposits in the 2022-23 financial year. In the 2021-22 and 2022-23 financial years a net loss was recorded. In the 2021-22 financial year when you started to focus more on the activity you spent approximately 15 hours per week concentrating on trades, research, and reviews. This occasionally could be up to 60 hours per week. In the 2022-23 financial year you spent around 14-15 hours per week researching and making trades. Of the time spent focused on the activity the majority of the time was researching, and a small amount would be spent completing trades.
Your trading strategy was a mix of short-term trading and mid-term swing trading. You researched digital assets to identify higher quality business with undervalued price. Your short-term trading goal was to maximize profits through high-frequency trading with a risk-to-reward ratio, leveraging market volatility. For the mid-term swing trading your goal was to generate sustainable profits through swing trading with a risk-to-reward ratio, focusing on market trends and cycles. You have not taken any formal training or education related to cryptocurrency, but you did spend time reading and researching. You have had some previous experience with share trading which you started in 20XX. The only professional assistance that you have received is when you needed to submit tax returns and used an accountant to help with lodgement. You maintain the records of the trades on the trading platform and keep ongoing records for previous assets. You have purchased a subscription to assist with tracking market conditions and research.
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 102-5 Income Tax Assessment Act 1997 section 102-10
Section 995-1 of the Income Tax Assessment Act (ITAA 1997) 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 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 on what constitutes a business 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 whether a business is being carried on. Paragraph 13 of TR 97/11 provides that the courts have held that the following indicators are relevant: • 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. In the case of cryptocurrency trading repetition and regularity are considered to be important indicators on whether or not a business is being carried on, with the size and scale of the activity being supporting factors. In your case, in the 2021-22 financial year you made several transactions using the crypto exchange with majority of these transactions purchasing the currency and just over half of the transactions of selling the cryptocurrency that was bought within the year. Over half of the buying transactions occurred between the middle of the 2021-22 financial year. While the sale transactions occurred over two where a majority of the cryptocurrency was sold. While transactions occurred within each month, there is no pattern or consistency with the transactions as it ranges with the buy transactions and the sale transactions. Over half the buy transactions that have remained active from the 2021-22 financial year and have been carried over into the 2022-23 financial year.
Within the 2022-23 financial year you made less transactions overall, with few of these transactions purchasing cryptocurrency and most of the transactions selling the cryptocurrency that was brought or carried over. During the 2022-23 financial year the overall transactions for buying and selling were lower compared to the previous year. The of the buy transactions occurred within the first two months of the 2022-23 financial year. With the selling transactions having a steady pace throughout the year. Transactions did not occur every month for this year and in some cases if transactions occurred it was less than the average of at least 10 transactions per month based on total transactions for the year. There is no identifiable pattern in the buying or selling of cryptocurrency. There is also no pattern regarding the time in which the cryptocurrencies are held before selling. Although you had a few transactions per month which could be suggestive that a business of cryptocurrency trading was being carried on, the repetition and regularity of your trading falls short of what would be expected of a cryptocurrency business.
When looking at the indicators of carrying on a business there is the size, scale and permanency of the activity to take into account. It has been established that your trading size and scale is limited overall. Regarding the permanency of the activity, you had a downturn in trading and an increase in selling in the 2022-23 financial year. Before starting trading in cryptocurrency, you have only completed research and reading but have not sought guidance from a third-party professional to assist in providing knowledge or advice. You only sought out assistance for the completion of tax returns. You did have a strategy in place of short-term and mid-term swing trading while also using a Japanese candle stick method. You started with the short-term trading that generated profit and then used those profit to fund the mid-term trading. This strategy changed in the 2022-23 financial year due to the downturn in the cryptocurrency market. To fund this activity, you have used finances that you inherited or have redrawn from your mortgage. You have not used commercial business financing.
You have not established a pattern of trading in cryptocurrencies and your transactions are not performed in a systematic manner. Although you spend approximately 15 hours each week on crypto based activities and keep records of your transactions, your situation is not indicative of a business of cryptocurrency trading. Another factor when looking at if the activity is considered a business if the activity is planned, organised and carried on in a businesslike manner. When looking at the above factors it would show that the activity is carried on in an ad hoc basis as you are also maintaining full time employment. While you have entered the activity with the purpose of making a profit the overall outcome of your activity has produced a loss, for both the 2021-22 and 2022-23 financial years. It is considered that you were not carrying on a business as a cryptocurrency trader during the 2021-22 and 2022-23 financial year. Your trading activities were not repetitive or regular, nor of the size and scale of businesses in this industry. You would be regarded as an investor rather than a trader.
As you were not carrying on a business any profit from your cryptocurrency activity would not be assessable under section 6-5 of the ITAA 1997. The disposal of your crypto assets will be a CGT event A1 and any gains you have made on the sale of those shares will be a capital gain and assessable under section 102-5(1) of the ITAA 1997.