Edited version of private advice

Authorisation Number: 1051781223882

Date of advice: 24 November 2020

Ruling

Subject: Cryptocurrency

Question 1

Are you carrying on a business of gambling?

Answer

No.

Question 2

Are gains derived from your gambling assessable income?

Answer

No.

Question 3

Are losses incurred from your gambling deductible?

Answer

No.

Question 4

Will the disposal of the Cryptocurrency upon transferring it to the on-line gambling platform be taxed on capital account and not on revenue account?

Answer

Yes.

Question 5

Will the disposal of the Cryptocurrency following receiving it from the on-line gambling platform (as winnings) be taxed on capital account and not on revenue account?

Answer

Yes.

Question 6

If the answer to questions 4 is yes, is the Cryptocurrency you acquired for the purpose of transferring to the on-line gambling platform a 'personal use asset' under subsection 108-20(2) of the ITAA 1997?

Answer

Yes.

Question 7

If the answer to questions 5 is yes, is the Cryptocurrency you acquired as a result of winnings received from the on-line gambling platform a 'personal use asset' where you then immediately transferred it back to your on-line gambling account under subsection 108-20(2) of the ITAA 1997?

Answer

Yes.

Question 8

If the answer to questions 5 is yes, is the Cryptocurrency you acquired as a result of winnings received from the on-line gambling platform a 'personal use asset' where you cashed it in for AUD result in a capital gain or loss?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

You undertook gambling activities as a result of a significant gambling addiction for a large part of the 2019-20 financial year.

You mainly financed your gambling using Cryptocurrency, you would purchase Cryptocurrency from a cryptocurrency exchange and transfer it to a betting website and then subsequently placing bets on various events using Cryptocurrency on the betting website.

Once you initially acquired the Cryptocurrency, you instantly transferred the Cryptocurrency to the betting website in order to gamble.

The betting website works similarly to other betting websites, whereby you place a bet on an event occurring that had a certain odds, and if you won, you would receive the amount you bet multiplied by the odds. If you lost, you would lose the entire amount that you bet.

You did not have any control over the type of cryptocurrency you bet. As you deposited Cryptocurrency to the betting website, you were only able to bet using Cryptocurrency.

Generally any 'winnings' you made remained on the betting website as part of an overall balance denominated in Cryptocurrency, and you could choose whether to bet again or withdraw these winnings. Generally, when you won a bet, you would immediately start looking for another opportunity to place a bet on.

Most of the time you would lose all the Cryptocurrency within a few hours, however there were a few times where you withdrew amounts of Cryptocurrency from the betting website into the cryptocurrency exchange, where you would then either sell the Cryptocurrency for AUD, or immediately transfer it back to the betting website for more gambling (which you usually did instead of selling the Cryptocurrency for AUD - due to your gambling addiction).

The net total of AUD going into and out of cryptocurrency exchanges during the 2019-20 financial year resulted in a substantial loss.

The bets you placed were mostly on the basis of 'gut feeling' or your best guess from your prior knowledge.

You gambled for approximately 5 to 6 months during the 2019-20 financial year, having spent a few hours per week gambling.

The most research you did was to occasionally look up certain information to help guess what the expected outcome would be for each event you placed bets on.

You did not draw up any business plan.

You did not set up a home office.

You deposited a substantial amount of money into cryptocurrency accounts during the 2019-20 financial year for the sole purpose of transferring the Cryptocurrency to the betting website in order to gamble. You have also supplied records which show you purchased Cryptocurrency, transferred the Cryptocurrency to the betting website, and transferred Cryptocurrency from the betting website to the cryptocurrency exchange on many occasions (several hundred) during the 2019-20 financial year.

You have supplied a detailed spreadsheet with confirms that each time you purchased the Cryptocurrency and immediately transferred it to the betting website, and each time you transferred the Cryptocurrency from the betting website to the cryptocurrency exchange, the value of the Cryptocurrency never exceeded $10,000.

The Cryptocurrency was only ever held on the cryptocurrency exchange for the sole purpose of gambling.

When the Cryptocurrency was initially acquired, along with when the Cryptocurrency winnings was transferred back to the cryptocurrency exchange, and then subsequently transferred back to your gambling account for further betting , it was immediately transferred (i.e. it only ever was held on the exchange for a matter of hours or minutes in some cases).

In addition, in the few times where the Cryptocurrency was cashed in following the Cryptocurrency winnings being transferred to the exchanged, the Cryptocurrency was also only ever held on the exchange for a matter of hours or minutes in some cases.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Paragraph 118-37(1)(c)

Reasons for decision

Questions 1,2 and 3

Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Betting and gambling wins are not assessable under section 6-5 of the ITAA 1997 and losses are not deductible under section 8-1 of the ITAA 1997, unless you are carrying on a business of betting or gambling.

Taxation Ruling IT 2655 discusses the Commissioner's opinion on whether betting and gambling can be considered to be carrying on a business. This ruling states at paragraph 7:

Ultimately each case will depend on its own facts. There is no Australian case in which the winnings of a mere punter have been held to be assessable (or the losses deductible). As Hill J stated in Babka v FC of T 89 ATC 4963; (1989) 20 ATR 1251, although mere punting may constitute a business, the intrusion of chance into the activity as a predominant ingredient will generally preclude such a finding. If a taxpayer is involved in other business activities in the racing industry, it will be more likely that betting activities are of a business nature.

The court in Brajkovich v. FC of T 89 ATC 5227;(1989) 20 ATR 1570 (Brajkovichs case), identified the following criteria for determining whether or not a person is in the business of gambling. These criteria are:

1 Whether the betting is conducted in a systematic, organised and businesslike way

Courts have held that to determine this issue, it is necessary to examine the manner in which the gambling activities are conducted. For example, did the taxpayer rent an office, employ staff, use a database to calculate odds, take steps to lessen and exclude the element of chance and maintain adequate records.

2 The scale of the gambling activities

The volume and size of bets are significant in most forms of gambling. However, the Court in Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922 found that scale itself is not determinative of the outcome.

The taxpayer in Brajkovichs case did not carry on a business of gambling. The taxpayer bet over $950,000 in three years and was involved in horse training.

3. Whether betting is related to or part of other activities of a businesslike character

Generally where a taxpayer is carrying on a business of betting or gambling, the betting transactions are connected with some other activity which itself constitutes a business carried on by the taxpayer, for example, breeding or training horses (Prince v. FC of T (1959) 7 AITR 505; 12 ATD 45). The taxpayer in that case conducted a business as a bookmaker and also had interests in a horse training business.

4. Whether the gambling activity is principally for profit or principally for pleasure?

Issues such as attending race meetings and having a passion for gambling need to be considered when considering if the activities are conducted for profit or pleasure.

In Brajkovichs case the Court said "the gambler who seeks to demonstrate that he is a businessman has more to show than those who engage in more conventionally 'commercial' activities".

5. Whether the form of betting chosen is likely to reward skill and judgement or depends purely on chance

In Brajkovichs case the Court said:

Gambling which involves a significant element of skill, for example a professional golfer's betting on himself, is more likely to have tax consequences than gambling on merely random events. It is difficult to imagine how people in the latter category could be regarded as in a gambling business. Particularly this is so where the house takes a percentage, so that the overall result is necessarily a continual diminution of the collective funds of the customers. Although many roulette players sometimes earn substantial sums by their efforts, it is hard to see how one could characterise as a business playing a game in which the results are (or should be) purely random and in which there is a high probability that each player will lose in the long run

6. Whether the gambling activity is of a kind ordinarily thought of as a hobby or pastime

Betting on horseracing and other sporting events is ordinarily thought of as a hobby or pastime rather than engaging in a business.

In Babka v. FC of T 89 ATC 4963; (1989) 20 ATR 1251 (Babkas case) it was held:

A taxpayer who did no more than bet could never be regarded as carrying on a business, regardless of the frequency, scale or system-based nature of the betting. A pastime does not turn into a business merely because a person devotes considerable time to it and has retired from a previous full time profession.

In Babkas case, the taxpayer's activities were not so considerable, systematic and organised that they could be said to exceed those of a keen follower of the turf and that the element of chance as a dominant ingredient will usually preclude such a finding.

You are not carrying on a business of gambling. The bets you placed were mostly on the basis of 'gut feeling' or your best guess from your prior knowledge, and the most research you did was to occasionally look up certain information to help guess what the expected outcome would be for each event you placed bets on. You also did not establish a business plan.

There is still a high element of chance involved in gambling on those type of events. By using specific techniques to choose which events to bet on, you may reduce the odds on your gambling activities, however, your overall gains are dependent on chance rather than skill.

We acknowledge that you keep results and relevant records of the numerous times you transferred Cryptocurrency onto the on-line gambling platform, along with the fact that you have invested time and money into your activities. However these factors do not amount to carrying on a business.

The overall evaluation of your gambling activities do not lend themselves to the existence of a business. As in Babkas case your activities can not be said to exceed that of a keen follower of certain types of events.

As you are not carrying on a business of betting or gambling, the Cryptocurrency winnings you receive in relation to this activity are not assessable under section 6-5 of the ITAA 1997 and the expenses related to the activity are not deductible under section 8-1 of the ITAA 1997.

Paragraph 118-37(1)(c) of the ITAA 1997 provides that a capital gain or loss relating to gambling is disregarded.

Profit making Undertaking or Plan

Profits arising from the carrying on or carrying out of a profit-making undertaking or plan is assessable income according to Section 6-5 ITAA 1997.

We look at TR 92/3 Income tax: whether profits on isolated transactions are income states that a profit from an isolated transaction is generally income when both of the following elements are present

a) The intention was to make a profit or gain, and

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

While not necessarily the sole intention, the activity must have profit-making as a significant purpose.

In your case, the fact that whether or not you won or lost a bet was largely down to luck, along with the fact that you completed very limited research and analysis show your activities are not a profit-making undertaking or plan.

Therefore, your activities do not amount to carrying on a business and that any amounts received for successful on-line betting will not be the result of a profit-making undertaking or plan.

No other provision of the ITAA 1997 applies to your betting and gambling activities. As such your betting and gambling winnings are not assessable income and the associated losses are not allowable deductions.

Questions 4 and 5

Capital Account

The basic CGT provisions are contained in Part 3-1 of the ITAA 1997. Broadly, these provisions include in your assessable income any assessable gain made when a CGT event happens to a CGT asset that you own (to the extent they are not reduced by capital losses).

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 Cryptocurrency 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.

CGT event A1 under section 104-10 happens if you dispose a CGT asset. You make a capital gain if your capital proceeds exceed the CGT asset's cost base.

Further, paragraph 15 of TD 2014/26 provides:

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).

Every transaction (whether crypto - crypto, crypto - FIAT (legal tender) or FIAT - crypto) results in a CGT event which will reflect either a gain or a loss. This will apply where you have transferred Cryptocurrency you have initially acquired to the gambling site platform, along with where you have acquired Cryptocurrency via winnings from the gambling site platform and transferred the Cryptocurrency back to the gambling site platform, and also where you have disposed any Cryptocurrency for cash.

As such, the disposal of your Cryptocurrency will be subject to the CGT provisions.

Questions 6,7 and 8

Summary

We accept that due to the way you were conducting your gambling activities your Cryptocurrency are either 'personal use assets', or in situations where they were sold for AUD, due to this being done so soon (a matter of hours or even minutes in some cases) after the Cryptocurrency was acquired from the betting website as winnings we accept that there would be no CGT gain or loss in those situations.

In addition, as the first element of the cost base of the Cryptocurrency you disposed of each time you transferred the Cryptocurrency to the betting website to place bets in Cryptocurrency was always less than $10,000, the exemption for personal use assets will apply.

Detailed reasoning

Section 108-20 ITAA 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.

When the CGT provisions of the 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

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.

ATO ID 2002/795 defines mainly as meaning predominantly, chiefly, principally, or for the most part.

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, or as part of a business or for a profit-making purpose. The categories are mutually exclusive.

Taxation determination TD 2014/26 provides guidance on whether an asset is kept or used mainly for your personal use or enjoyment, and the following paragraphs (19,20 and 21) from TD 2014/26 are relevant:

19. 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. 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. Other categories of use conceivably could exist; taxpayers in these cases should seek private rulings.

20. An example of where bitcoin would be considered to be a personal use asset is

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. If the bitcoin were instead purchased to facilitate the purchase of income producing investments, they would not be personal use assets.

21. Another example of where bitcoin would not be a personal use asset is where an individual taxpayer mines bitcoin and keeps those bitcoin for a number of years with the intention of selling them at opportune times based on favourable rates of exchange.

Timing

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

Application to your circumstances

The definition of a personal use asset also has regard to the purpose for which an asset is kept.

In your case when you initially acquired the Cryptocurrency you had the definite intention of transferring them to the on-line gambling platform, as evidenced by your action of instantly transferred the Cryptocurrency to the betting website in order to gamble.

In addition, generally when any 'winnings' were made when you won a bet, you would immediately start looking for another sporting event to place a bet on.

Most of the time you would lose all the Cryptocurrency within a few hours, however there were a few times where you withdrew amounts of Cryptocurrency from the betting website into the cryptocurrency exchange, where you would then either sell the Cryptocurrency for AUD, or immediately transfer it back to the betting website for more gambling (which you mostly did instead of selling the Cryptocurrency for AUD - due to your gambling addiction).

The Cryptocurrency was only ever held on the exchange for the sole purpose of gambling.

When the Cryptocurrency was initially acquired, along with when the Cryptocurrency winnings was transferred back to the cryptocurrency exchange, and then subsequently transferred back to your gambling account for further betting , it was immediately transferred (i.e. it only ever was held on the exchange for a matter of hours or minutes in some cases).

In addition, in the few times where the Cryptocurrency was cashed in following the Cryptocurrency winnings being transferred to the cryptocurrency exchange, the Cryptocurrency was also only ever held on the exchange for a matter of hours or minutes in some cases.

Overall this demonstrates that the Cryptocurrency have been held mainly for personal use where they were transferred to the betting website immediately following you acquiring them (either initially following purchasing the Cryptocurrency or via winnings from the gambling site) - in reference to paragraph 20 of TD 2014/26. As such, we accept that due to the way you were conducting your gambling activities your Cryptocurrency are 'personal use assets' in those situations.

In those situations where you sold the Cryptocurrency for AUD following you acquiring them from the betting website as winnings we accept that there would be no CGT gain or loss in those situations. This is because the sale occurred almost immediately the transfer was completed as noted above.

CGT event for a personal use asset

If the first element of the cost base of a personal use asset is $10,000 or less, any capital gain is disregarded (subsection 118-10(3) of the ITAA 1997). Capital losses from personal use assets are also disregarded.

In your case, each time you purchased the Cryptocurrency and immediately transferred it to the betting website, and each time you transferred the Cryptocurrency from the betting website to the cryptocurrency exchange, the value of the Cryptocurrency never exceeded $10,000.

As such your Cryptocurrency utilised in the above situations are 'personal use assets' as defined in subsection 108-20(2) of the ITAA 1997 and therefore the exemption for personal use assets in subsection 118-10(3) of the ITAA 1997 will apply to disregard any capital gains or losses derived by you upon the disposal of the Cryptocurrency.

CGT event where the Cryptocurrency was not a personal use asset

As stated above, in the situations where the Cryptocurrency was sold for AUD following you acquiring it from the betting website as winnings, whilst a CGT event has occurred in those situations, due to this being done so soon after the Cryptocurrency was acquired we accept that there would be no CGT gain or loss in those situations as noted above.