Private ruling: Deductibility of losses from Binary Options trading
Date of advice: 4 May 2017
Published: September 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: For the 2015-2016 income year did you carry on a business of trading in binary options? | A1: No. | Q2: For the 2015-2016 income year did you pass the assessable income test of the non-commercial loss provisions? | A2: Not Applicable. No business being carried on. | Q3: For the 2015-2016 income year did you carry out binary options trading with a profit making purpose? | A3: Yes | Q4: For the 2015-16 income year are you entitled to a deduction pursuant to section 25-40 of the Income Tax Assessment Act 1997 for your loss from binary options trading? | A4: Yes

Relevant facts and circumstances: During the 2015-2016 income year you lost a large amount of money trading binary options. You found out about binary options trading from an advertisement on the internet. You commenced trading in binary options because you thought it would be a quick and easy way to make money. You have not undertaken other option, futures or share trading activities. You did not undertake any research into binary options trading. You spent approximately 10 hours on average per week trading binary options. You did not prepare a business plan. You do not have records of the actual trades undertaken as you have closed your account and are unable to access your account history. You estimate that the number of trades was in the hundreds, and the value of profitable trades was in the order of several million dollars. Some individual trades yielded a profit in the order of $40,000 each. The value of loss trades was the value of profitable trades plus the value of the funds transferred to your trading account. You do not intend to undertake any further trading in binary options. During the 2015-2016 income year the whole of the above funds were lost in the course of the binary options trading.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 15-5 | Income Tax Assessment Act 1997 Section 25-40 | Income Tax Assessment Act 1997 paragraph 118-37(1)(c)

Reasons for decision: Summary: You were not carrying on a business of binary options trading in the year ended 30 June 2016. However, you were carrying out commercial binary options trading with a profit making purpose. You can offset your loss from your binary option trading against your other income, in your income tax return for the year ended 30 June 2016. | Detailed Reasoning - Detailed reasoning: The principles set out in Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences (TR 2005/15) and ATO Interpretative Decision ATO ID 2010/56 Assessable income: derivation of income - spread betting (ATO ID 2010/56) have been applied. Participation in binary options trading has been identified as a commercial transaction and seen as speculation on a financial risk similar to what is discussed in the ATO views contained in TR 2005/15 and ATO ID 2010/56. Therefore in adopting the above view, where binary options trading is carried on as a business, the gains from the binary options transactions will be accounted for under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and the losses under section 8-1 of the ITAA 1997. If the binary option trading is not carried on as a business, but is however carried on as either: • commercial binary options trading with a profit making purpose; and/or • a profit making undertaking of binary options trading, then any profit will be assessable on revenue account as either ordinary income and accounted for under section 6-5 of the ITAA 1997, or the profit will be assessable as a profit making undertaking in accordance with section 15-15 of the ITAA 1997. In your case the alternatives have been considered and it has been concluded that your binary options trading in the year ended 30 June 2016 was; • commercial binary options trading with a profit making purpose, and therefore the resulting loss will be a loss on revenue account under section 25-40 of the ITAA 1997. | Detailed Reasoning - Carrying on a business: Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) specifically refers to primary production. However the same principles apply to all businesses. The indicators of carrying on a business which the courts have considered to be relevant include: a. whether the activity has a significant commercial purposes or character; 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 regularity and repetition of the activity; e. 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; f. whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity. No one indicator is decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). The indicators must be considered in combination and as a whole. In applying factors (a) to (h) from TR 97/11 to determine whether you were carrying on a business, it is acknowledged that the activity undertaken by you had some characteristics that aligned with it being a business, rather than a hobby such as the purpose of profit, and it was characterised by regular and repetitive activity, but only for a limited period. However, whilst your binary option trading had a commercial purpose, you have stated that you had no intention of carrying on a business. You did not have a business plan. You have not undertaken any other option, futures or share trading activities and have not undertaken any research into binary options trading. You commenced the activity because you thought it would be a quick and easy way to make money. Thus, after consideration all of the relevant indicators and the circumstances of your case, it is considered that you were not carrying on a business of binary options trading. Commercial binary options trading with a profit making purpose; and/or A profit making undertaking of binary options trading. (Not carrying on a business of binary options trading.) Section 6-5 of the ITAA 1997 states that: 'Your assessable income includes income according to ordinary concepts, which is called ordinary income.' Profit or gain arising from an isolated business or commercial transaction will generally be ordinary income if the taxpayer's purpose in entering into the transaction was to make a profit. This would be the case even if the transaction was not part of the taxpayer's ordinary course of business. The High Court held in Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199 at 209-210; 18 ATR 693; 87 ATC 4363 (Myer), that: The authorities establish that a profit or gain so made [in an isolated transaction] will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit. Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides the ATO view on whether profits on isolated transactions are income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936), now section 6-5 of the ITAA 1997. The definition of 'isolated transactions' in paragraph 1 of TR 92/3 includes 'transactions entered into by non-business taxpayers'. Paragraph 16 of TR 92/3 states that: If a taxpayer who is not carrying on a business makes a profit, that profit is income if: (a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and (b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. For example, paragraph 19 of TR 2005/15 confirms the principles established in Myer and TR 92/3 are applicable to financial contracts for differences where the profit or loss was made in either a business operation or a commercial transaction for the purpose of profit making. TR 2005/15 states at paragraph 23 that: …speculation on a financial risk can be characterised as being commercial, in that it increases the efficiency of the financial markets by adding to the depth and liquidity of the markets. In concluding that speculation on a financial risk can be characterised as being commercial, TR 2005/15 bases that conclusion on the following attributes of a financial contract for differences: • it cannot be assigned; • it does not provide ownership of the underlying asset; • they are essentially contracts of speculation productive of a gain or a loss stemming from exposure to a short term financial risk; and • the risks assumed are all the basic subject matter of the financial services industry. It is considered that binary options have the same characteristics. They are commercial transactions. Binary options trading are seen as commercial transactions, this combined with the fact that you had a profit making purpose, means that had you made net profits from the venture / activity in the year ended 30 June 2016 they would have been assessable as either ordinary income under section 6-5 of the ITAA 1997, or assessable under section 15-15 of the ITAA 1997 as a profit making undertaking. Consequently your binary option trading losses are deductible under section 25-40 of the ITAA 1997. You may offset your trading loss against your other income. Your binary option trading loss should be included at label D15 of your income tax return supplementary section. Note there is no trading stock equation, binary options are not trading stock, you do not own the underlying asset. | Detailed Reasoning - Note:: This private ruling is based on the facts provided and that the money was lost due to actual binary option trades. If any of the money was lost due to a scam by another party, then the loss would be considered a capital loss and could only be offset against other capital gains and not ordinary income.