Edited version of your written advice

Authorisation Number: 1012640698395

Ruling

Subject: Sale of Bitcoin

Question 1

Will amounts you derive from selling Bitcoin be assessable income to you as ordinary income or as income from a profit-making undertaking or plan?

Answer

No

Question 2

Will your selling of Bitcoins give rise to a capital gains tax (CGT) event?

Answer

Yes

Question 3

Will any capital gain made on the sale of your Bitcoin be disregarded under subsection 118-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997)

Answer

No

This ruling applies for the following period

Year ended 30 June 2014

Year ending 30 June 2015

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You took a personal interest in Bitcoin.

You purchased equipment to produce bitcoins to gain knowledge on a new technology at a time when they had a negligible value. The amount you spent would have purchased far more bitcoins than you generated with the equipment.

This interest was pursued outside of working hours.

You stopped producing bitcoins as you felt you had enough to satisfy your personal needs in regards to expanding your knowledge about the protocol.

You did not intend to generate a profit from bitcoin or to increase your personal wealth.

You gave away some bitcoin and you have the remaining bitcoin in your possession.

You are seriously contemplating selling bitcoins at opportune times based on market factors and the tax implications of their sale.

You do not intend to run any sort of business that takes bitcoin as payment, trades bitcoins, sells bitcoins, or uses bitcoins in any way.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 6-10(4)

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-35(1)

Income Tax Assessment Act 1997 subsection 104-35(2)

Income Tax Assessment Act 1997 subsection 104-35(3)

Income Tax Assessment Act 1997 subsection 104-35(5)

Income Tax Assessment Act 1997 paragraph 104-35(5)(b)

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

Income Tax Assessment Act 1997 subsection 108-20(1)

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 subsection 118-10(3)-

Income Tax Assessment Act 1997 section 118-20.

Reasons for decision

Summary

We have concluded that your activities do not amount to carrying on a business and that any amounts received on your proposed sales of Bitcoin will not be the result of a profit- making undertaking or plan.

The disposal of Bitcoin to a third party will result in CGT event A1 happening and you will make a capital gain if the capital proceeds from the disposal of the bitcoin are more than the bitcoin's cost base. As you have retained the Bitcoin for a significant period without using them and you are keeping them to sell at opportune times, the Bitcoin would not be regarded as a personal use asset and therefore any capital gain cannot be disregarded.

Detailed reasons for decision

Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what amounts are included in the taxpayer's assessable income. It provides that the following amounts are included:

• income according to ordinary concepts; that is, ordinary income (section 6-5 of the ITAA 1997), or

• an amount which is included by a specific provision about assessable income; that is, statutory income (section 6-10 of the ITAA 1997).

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer 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 service, income from property and income from carrying on a business.

Subsection 6-10(4) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income derived directly or indirectly from all sources during the income year.

Section 10-5 of the ITAA 1997 lists provisions which include statutory income in a taxpayer's assessable income. Included in this list are capital gains under section 102-5 of the ITAA 1997.

Subsection 102-5(1) of the ITAA 1997 provides that a taxpayer's assessable income includes their net capital gain for the income year.

Where a transaction gives rise to both ordinary income and a capital gain for capital gains tax (CGT) purposes, the full amount of ordinary income is included in assessable income and the capital gain is reduced by that amount (as per section 118-20 of the ITAA 1997).

Ordinary income

The sale of Bitcoin in your circumstances will not constitute ordinary income.

You plan to sell parcels of Bitcoins only at opportune times, therefore your activities will not possess the necessary elements of periodicity, recurrence or regularity that are common to receipts of ordinary income.

Further, the proposed sales will not constitute income from the provision of personal services, are not sourced from property, and will not be derived directly from a business activity.

Are you carrying on business?

The common law has identified a number of indicators that are relevant in determining whether a taxpayer's activities constitute the carrying on of a business. The question whether a taxpayer's activities should be characterised as a business is primarily a matter of general impression and degree (Ferguson v. Federal Commissioner of Taxation 79 ATC 4261; (1979) 9 ATR 873).

The courts have held that the following indicators are relevant to the question of whether a taxpayer's activities amount to the carrying on of a business:

(a) whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

(b) whether the taxpayer has more than just an intention to engage in business;

(c) whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

(d) whether there is repetition and regularity of the activity;

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

(f) whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

(g) the size, scale and permanency of the activity; and

(h) whether the activity is better described as a hobby, a form of recreation or a sporting activity.

The facts provided do not indicate that your purpose and intention was to make a profit from the mining activities. You invested some money in computer hardware to enable mining capabilities with mining only occurring over a one-month period for experimental and learning purposes.

Your activities were not of a considerable size and scale nor were they conducted routinely and systematically, although mining does require some degree of sophistication. The nature of the activities was not recurrent and regular, and merely resulted in you acquiring some Bitcoins with no intention of selling them at a profit. Your lack of a purpose of profit or gain is borne out by the fact that you gave away a percentage of your Bitcoins.

Overall, from the facts provided, your activities as conducted and proposed will not constitute carrying on a business of trading in Bitcoin.

Profit making Undertaking or Plan

Section 15-15 of the ITAA 1997 includes in a person's assessable income profit arising from the carrying on or carrying out of a profit-making undertaking or plan.

As section 6-5 of the ITAA 1997 does not apply, any profit from the proposed transactions at issue in your case would be assessable income under section 15-15 of the ITAA 1997 if the sale of Bitcoin would be considered to amount to a profit-making undertaking or plan.

In your case, however, the experimental nature of your activities and the fact that you donated or gave away a percentage of your Bitcoin are factors that are not indicative of a profit-making undertaking or plan.

Capital gains tax (CGT)

Is Bitcoin a 'CGT asset'?

The term 'CGT asset' is defined in subsection 108-5(1) of the ITAA 1997 as:

(a) any kind of property; or

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

Is Bitcoin 'any kind of property'?

In Yanner v. Eaton (Yanner) the High Court accepted that property refers not to a thing but to a description of a legal relationship with a thing; and, more specifically, to the degree of power that is recognised in law as permissibly exercised over the thing. Noting the difficulties in determining what is meant by 'property' in a thing, their honours quoted Professor Gray who stated '[a]n extensive frame of reference is created by the notion that 'property' consists primarily in control over access'.

There is no single test nor a single determinative factor for identifying a proprietary right. Courts have emphasised different characteristics in different circumstances. One formulation that has been applied in Australia is the 'Ainsworth test' - which asks whether a right is definable, identifiable and capable of assumption by third parties, and permanent or stable to some degree. However, courts have also focused on factors such as excludability (whether it is possible to exclude others from the right in question), commercial value (whether something is treated in commerce as a valuable proprietary right), and enforceability of the right against third parties generally. Accordingly, in determining whether something amounts to property it is necessary to weigh up a range of factors, and to treat none as definitive.

In the case of Bitcoin, the relevant relationship in the nature of property that must be considered is the relationship between:

(a) the object or thing, bitcoin, being the digital representation of value constituted by three interconnected pieces of information (a Bitcoin address; the Bitcoin holding or balance in that address; and the public and private keypair associated with that address); and

(b) the bundle of rights (hereafter referred to as 'Bitcoin holding rights') ascribed to a person with access to the bitcoin under the Bitcoin software and by the community of Bitcoin users.

The most important of these Bitcoin holding rights are the rights of control over one or more bitcoins in the holder's Bitcoin wallet, for example, the capacity to trade a bitcoin for other value or use it for payment. These rights, however, do not amount to a chose in action as a Bitcoin holding does not give rise to a legal action or claim against anyone.

However, there are other factors that support the conclusion that Bitcoin holding rights are proprietary in nature. The most compelling is that bitcoins are treated as valuable, transferable items of property by a community of Bitcoin users and merchants. There is an active market for trade in bitcoins and substantial amounts of money can change hands between transferors and transferees of bitcoins. Armstrong DLW GmbH v. Winnington Networks Ltd and other English and Australian cases evidence a judicial willingness to regard property that is valuable in commerce as property for the purposes of law.

Bitcoin holding rights involve an inherent excludability because the Bitcoin software restricts control of a bitcoin holding to the person in possession of the relevant private key. As the Bitcoin software prescribes how the transfer and trade of bitcoins can occur and transactions are verified through the Bitcoin mining process, Bitcoin holding rights are definable, identifiable by third parties, capable of assumption by third parties, and sufficiently stable as per the Ainsworth test.

In weighing all these factors it is considered that Bitcoin holding rights amount to property within the meaning of paragraph 108-5(1)(a) of the ITAA 1997. As such, a person holding a bitcoin is considered to hold a 'CGT asset' for the purposes of that provision.

Apart from a dealing in individual bitcoins it is possible for there to be a dealing relating to the Bitcoin wallet (which would necessarily be a dealing in each and every bitcoin in the wallet and the private key), or just in the private key. Rights may exist in relation to either. Bitcoin wallet rights are essentially the same as the Bitcoin holding rights but represent a more extensive interest, the whole (the wallet) including the lesser (individual bitcoins). Rights in the private key would fall short of 'property' for the purposes of paragraph 108-5(1)(a) of the ITAA 1997. However, the law of confidential information would point to the existence of an equitable right in relation to the private key, enforceable by a court, which would then give rise to a CGT asset for the purposes of paragraph 108-5(1)(b). Dealings in relation to either the wallet or the private key are therefore capable of amounting to CGT events that happen to CGT assets.

CGT consequences of disposing of Bitcoin

The disposal of Bitcoin to a third party gives rise to CGT event A1 under subsection 104-10(1) of the ITAA 1997. 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) of the ITAA 1997, 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) of the ITAA 1997

However, section 118-20 of the ITAA 1997 reduces any capital gain made by a taxpayer by an amount that is included in the taxpayer's assessable income under another provision of the tax law, for example, ordinary income under section 6-5 of the ITAA 1997

Under subsection 118-10(3) of the ITAA 1997, a capital gain made from a personal use asset is disregarded if the first element of the cost base is $10,000 or less. In addition, any capital loss made from a personal use asset is disregarded under subsection 108-20(1) of the ITAA 1997.

Whether a personal use asset

Paragraph 108-20(2)(a) of the ITAA 1997 provides that a personal use asset is 'a *CGT asset (except a *collectable) that is used or kept mainly for your (or your *associate's) personal use or enjoyment'.

The Macquarie Dictionary, 2001, revised 3rd edition, The Macquarie Library Pty Ltd, NSW defines 'mainly' as 'chiefly; principally; for the most part'.

In Favaro v. FC of T (1996) 34 ATR 1; 96 ATC 4975, the Federal Court held that Italian currency which was converted to Australian currency was not a 'personal use asset' under the equivalent provision of the Income Tax Assessment Act 1936 (ITAA 1936), section 160B of the ITAA 1936. The Court accepted the Commissioner's submission that 'the expression "personal use" is used in section 160B in contradistinction to use for business or profit making purposes' (section 160B of the ITAA 1936 was rewritten as sections 108-10 and 108-20 of the ITAA 1997).

The evidence of Mr Favaro was that he kept the Italian currency for the purpose of its being exchanged for Australian currency at a favourable rate. The Court concluded that the Italian currency was not ''used or kept primarily for the personal use'' and that the exchange gain made by the applicants upon exchanging their Italian currency for Australian currency was an assessable capital gain under Part IIIA of the ITAA.

Given the inherent nature of Bitcoin is that it is either used as a means of exchanging it for something of value, or it is kept as a speculative investment, the fact that you have held on to the bitcoins for four years and have not used them to purchase anything demonstrates that you have not used them mainly for personal use. Although you may have mined the bitcoin for your personal interest, curiosity or other reasons, once you completed the mining process, you do not use the bitcoin for this purpose. The mined bitcoins simply sit in your Bitcoin wallet until you transfer them to someone else's Bitcoin wallet.

The definition of a personal use asset also has regard to the purpose for which an asset is kept. In your case, the fact that you are keeping the Bitcoin to sell at opportune times based on market factors indicates that you are not keeping the Bitcoin for personal use, but rather to make a profit.

Therefore, we do not consider the Bitcoin in your possession to be ''used or kept primarily for the personal use'' and any gain made by you upon exchanging or selling your Bitcoin will be an assessable capital gain under Part IIIA of the ITAA.

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