Edited version of private advice

Authorisation Number: 1051694175099

Date of advice: 1 October 2020

Ruling

Subject: Cryptocurrency - non-fungible tokens

Question 1

Are your Non-Fungible Tokens assets pursuant to subsection 108-5(1) of the ITAA 1997?

Answer

Yes

Question 2

Are your Non-Fungible Tokens personal use assets, pursuant to subsection 108-20(2) of the ITAA 1997?

Answer

No

Question 3

Are your Non-Fungible Tokens collectables pursuant to subdivision 108-D of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You acquired X Non-Fungible Tokens for a quantity of another cryptocurrency.

You are not using the Art for commercial use.

You purchased them to form a collection of Non-Fungible Tokens.

You are going to gift some to your relative.

You will purchase more in the future.

You will create more Non-Fungible Tokens.

You do not intend to play games.

The Terms of use of the Non-Fungible Tokens are available on its website.

Each Non-Fungible Token is represented in the Non-Fungible Tokens game (the App) by artwork (Art) that visually epitomize its particular characteristics.

There are three distinct parts to the Non-Fungible Tokens.

·         The Non-Fungible Token,

·         the App games are played on and

·         the licence to the Artwork.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 108-D

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Section 108-10

Income Tax Assessment Act 1997 Section 108-20

Reasons for decision

Question 1

Are your Non-Fungible Tokens CGT assets pursuant to subsection 108-5(1) of the ITAA 1997?

Answer

Yes

Detailed reasoning

The term 'CGT asset' is defined in subsection 108-5(1) as:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

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.

TD 2014/26 concludes that the bundle of rights ascribed to a person with access to the bitcoin - the 'Bitcoin holding rights' are propriety in nature and fulfils the criteria of a kind of property as defined by subsection 108-5(1)(a). This applies to all crypto or digital currencies.

Non-Fungible Tokens is a blockchain game on a cryptocurrency, that allows players to purchase, collect, create more and sell Non-Fungible Tokens

There are three distinct parts to the Non-Fungible Tokens game. The Non-Fungible Token, the App the game is played on and the licence to the Artwork. A Non-Fungible Token is a token validated through the blockchain. Each Non-Fungible Token is represented in the Non-Fungible Tokens game (the App) by artwork (Art) that visually epitomize its characteristics.

Non-Fungible Token

The Non-Fungible Tokens token is a non-fungible token that is built and hosted on the cryptocurrency blockchain using a Non-fungible Token Standard (Standard).

In the Standard each token is completely unique and can be identified and valued separately. It cannot be broken down into smaller portions like other cryptocurrencies.

The Terms of use state that you own the Non-Fungible Token.

The App

The Terms of Use state that you have no legal right title or interest in the App.

The Art

You have a royalty-free licence to use the "Art" for specific personal and commercial purposes while you own the Non-fungible Token. "Art" means any art, design, and drawings that may be associated with a Non-fungible Token that you own.

While a licence can be a CGT asset, it is not the licence that is being traded it is part of the bundle of rights that follow the token.

It is the Non-Fungible Tokens holding rights or the right to the access of the Non-Fungible Tokens, that is the capital gains asset.

Non-Fungible Tokens characteristics are like Bitcoin in that they both pass the Ainsworth test as described in Paragraph 7 of TD 2014/26. Non-Fungible Tokens holding rights are treated as valuable, transferable items of property by the Non-Fungible Tokens community. Non-Fungible Tokens holding rights are definable, identifiable by third parties, capable of assumption by third parties, and sufficiently stable There is an active market for trade for both Bitcoin and Non-Fungible Tokens and substantial amounts of money can change hands between transferors and transferees of the token.

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. Non-Fungible Tokens have the same characteristics as bitcoin.

Therefore, Non-Fungible Tokens are CGT assets.

Question 2

Are your Non-Fungible Tokens personal use assets, pursuant to subsection 108-20(2) of the ITAA 1997?

Answer

No

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 an intangible asset is a personal use asset is at the time of its disposal.

The Art

The Non-Fungible Tokens also include an additional visual aspect as Non-Fungible Tokens are represented in the Non-Fungible Token game with graphics or artwork

There is a royalty-free licence to use the "Art" for specific personal and commercial purposes.

The graphics are an expression of the unique attributes, that define the individual Non-Fungible Tokens.

Personal use assets

Section 108-20 of the Income Tax Assessment Act 1997 (TAA 1997) states 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 states 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 must 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 bitcoin 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 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 the bitcoin would 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 ATO ID 2002/795 Capital Gains Personal use asset - floor tiles 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 consider the nature of the property acquired when a cryptocurrency is disposed of (for example, whether a bitcoin is used to purchase an investment) when considering if a cryptocurrency 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.

When we consider if an asset is a personal use 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.

Application to your situation:-

Initial intention

In your case you became aware and interested in Non-Fungible Tokens and were curious to see what is was about.

Your intent when you purchased them was to-

·         form a collection,

·         to create new Non-Fungible Tokens

·         sell them at a later date, and

·         give some of them to your relative

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.

Length of time asset owned

The longer the period that a cryptocurrency is held, the less likely it is that it will be a personal use asset.

Disposal

The relevant time for determining whether an asset is a personal use asset is at the time of its disposal.

While you have not disposed of any Non-Fungible Tokens at this time, however we can consider future disposals in the basis of the information you have provided.

Creating new Non-Fungible Tokens increases your holdings of Non-Fungible Tokens and as with all cryptocurrencies if gained by through staking they are not necessarily personal use.

While Non-Fungible Tokens have utility beyond just being used as an investment or a store of value they can be used to play (other) games you have said that you do not intend to.

On the facts provided and circumstances as described we are of the opinion that on disposal your Non-Fungible Tokens will not be personal use CGT assets and any gains or losses will not be disregarded.

Question 3

Are your Non-Fungible Tokens collectables pursuant to subdivision 108-D of the ITAA 1997?

Answer

No

Detailed reasoning

The rules regarding the taxation of Collectables are found in Subdivision 108-B of the Income Tax Assessment Act 1997 (ITAA 1997).

Subsection 108-10(1) of the ITAA 1997 provides that in working out your net capital gain for an income year, capital losses from collectables can be used only to reduce capital gains from collectables.

Collectables are defined in the legislation. Subsection 108-10(2) of the ITAA 1997 provides that a Collectables is artwork, jewellery, an antique, or a coin or medallion, a rare folio, a manuscript or book or a postage stamp or first day cover that is used or kept mainly for your personal use or enjoyment.

As determined above your Non-Fungible Tokens are not used or kept main for your personal use or enjoyment, therefore they are not Collectibles.