Private ruling: Cryptocurrency - capital losses
Date of advice: 7 October 2022
Published: December 2022
Ruling period: Year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Are you entitled to claim a capital loss equal to the Australian dollar amount transferred to Platform A? | A1: Yes. | Q2: Are you entitled to claim a net capital loss from transferring cryptocurrency from your accounts to the unregulated wallet? | A2: Yes.

Relevant facts and circumstances: Platform A In October 20xx, you signed up with Platform A via the internet and deposited AUD with a view to trading in cryptocurrencies. Individual X contacted you regularly to discuss the results from the trades that was placed on your behalf. Over that period, the Platform A dashboard showed that the value of your account had more than doubled. Individual X suggested, and you agreed, to add further funds to your account. In November 20xx, you transferred AUD to your account with another cryptocurrency exchange, converted that to Bitcoin (BTC) and transferred the BTC to your Platform A account. You could not contact them since then and the Platform A website is no longer accessible. Crypto Investigation Agency (the Agency) Individual Y contacted you stating that the Agency believes that it will be possible to recover the funds that were lost as well as profits. Individual Y explained that, in order to recover that amount, it would be necessary to "circulate" cryptocurrency between a wallet registered in your name and the unregulated wallet. You made several transactions. You transferred AUD from your Australian bank account to your wallet with another cryptocurrency exchange, converted the amount to BTC and transferred the BTC to the unregulated wallet. You also transferred some cryptocurrency to your hardware cryptocurrency storage device before the first contact with Individual X. You were told that the transfer created confusion on the Blockchain and that the circulation had not established a sufficiently robust link to enable recovery and it would be necessary to circulate cryptocurrency between the hardware device and the unregulated wallet. You subsequently made that transaction to the unregulated wallet. Following confirmation of the BTC reaching the unregulated wallet, AUD $xxxx was recovered and deposited into your Australian bank account. You then transferred AUD from your Australian bank account and converted the amount to BTC, transferred the BTC to your hardware device wallet and then to the unregulated wallet. Following confirmation of the BTC reaching the unregulated wallet, a further AUD amount was recovered and deposited into your Australian bank account. You then transferred AUD from your bank account and converted the AUD to BTC, transferred the BTC to an Exchange B wallet and then to the unregulated wallet. You were told that if you could transfer one further amount, more money would be able to recover and deposit into your bank account once the Blockchain accepted that circulation. You transferred the AUD amount from your bank account and converted the amount to BTC, transferred the BTC to your Exchange B wallet and then to the unregulated wallet. However, you never heard from them again.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 116-20 | Income Tax Assessment Act 1997 Section 116-30 | Income Tax Assessment Act 1997 Section 116-45 | Income Tax Assessment Act 1997 Section 116-60

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens. Section 108-5 of the ITAA 1997 provides that 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 bitcoin a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997 ? explains that Bitcoin, and by extension, cryptocurrency in general is a CGT asset. The disposal of cryptocurrency that is not part of a business or commercial transaction will give rise to CGT event A1 under subsection 104-10(1) of ITAA 1997. A capital gain or loss is worked out at the time of disposal. The capital gain or loss is the difference between the cost base (which includes the acquisition cost of the CGT asset) and the capital proceeds from the CGT disposal event. The capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the event happening, or the market value of any other property you have received or are entitled to receive. If CGT event A1 occurs and you receive no capital proceeds, you will be deemed to receive the market value of the CGT asset you have disposed of as capital proceeds. However, section 116-60 of the ITAA 1997 provides that the capital proceeds from a CGT event are reduced if your employee or agent misappropriates (whether by theft, embezzlement, larceny or otherwise) all or part of those proceeds. The capital proceeds are reduced by the amount misappropriated. An agent can be described as someone who acts on behalf of another. An agency relationship is a relationship involving authority or capacity in one person (the agent) to create or affect legal relations between another person (the principal) and third parties ( International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 644). A relationship of agency is created either by the express or implied agreement of the principal and agent. Whether an agency relationship would be taken to exist would be dependent on the interactions had with the taxpayer and the "agent" and also any terms and conditions that governed the arrangement. | Detailed Reasoning - Application to your circumstances: CGT event A1 happened when you transferred the BTC to the account with Platform A. Based on the information provided, it is appropriate to consider that the person managing your Platform A account to have been your agent in facilitating the transactions made to acquire the proceeds. It is accepted that the assets you transferred to the agent have been misappropriated. Your Platform A account is no longer accessible, and you cannot establish contact with the agent. Consequently, the capital proceeds you were entitled to receive are reduced to zero by the operation of section 116-60 of the ITAA 1997. You also transferred money to the platform. As a result of entering into the arrangement with the platform, it is considered that you acquired contractual rights. These contractual rights are CGT assets for the purposes of paragraph 108-5(1)(b) of the ITAA 1997. The CGT event relevant in your situation is CGT event C2 - cancellation, surrender and similar endings. CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being cancelled, surrendered, released, discharged, satisfied or abandoned (paragraph 104-25(1)(b)). In DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423; [1978] HCA 12 it was recognised that a contract can come to an end merely by being treated as being at an end by the parties. It was held in Fitzgerald v. Masters (1956) 95 CLR 420 at 432 that: Where an inordinate length of time has been allowed to elapse, during which neither party has attempted to perform, or called on the other to perform, it may be inferred that the contract has been abandoned. What is really inferred in such a case is that the contract has been discharged by agreement, each party being entitled to assume from a long-continued ignoring of the contract on both sides that (in the words of Rowlatt J.) the matter is off altogether. Based on the information provided, it can be accepted that the contract has been treated as abandoned with effect that your rights under the contract has ceased. This results in CGT event C2 occurring. You have not received any proceeds for this event occurring however CGT event C2 is not subject to the market value substitution rule in section 116-30. Therefore, you will be entitled to a capital loss. | Detailed Reasoning - Conclusion: You are entitled to claim a capital loss equal to the Australian dollar amount transferred to Platform A. | Detailed Reasoning - Question 2: As mentioned above, the capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the event happening, or the market value of any other property you have received or are entitled to receive. Section 116-45 of the ITAA 1997 provides that the capital proceeds from a CGT event are reduced if it is unlikely that the taxpayer will receive some or all of those proceeds. However, this rule only applies if the non-receipt did not arise because of anything the taxpayer (or an associate) did or did not do and all reasonable steps were taken to get the unpaid amount paid. The amount of the reduction is the unpaid amount. Where the capital proceeds are reduced by an unpaid amount and some of the unpaid amount is subsequently received by the taxpayer, the capital proceeds are increased by the same amount (subsection 116-45(2)). With the Agency, you made several transfers of BTC to an unregulated wallet with the intention of recovering the funds that were lost as well as profits that were made by the scammers from trading cryptocurrencies using the stolen funds. When you transferred the BTC to the unregulated wallet, you were taken to have disposed of the BTC which triggered CGT disposal event A1. You are required to work out the capital gain or loss from these CGT events. You received 2 lots of recovered funds from the Agency; it is considered these amounts represent part of the capital proceeds from the disposal of your BTC. It is unlikely that you would be receiving any further proceeds from the Agency as the person from the Agency ceased all communication. Further, it is appropriate to consider all reasonable steps were taken to get the unpaid amount paid. Consequently, the capital proceeds you were entitled to receive from the CGT disposal event are reduced by the operation of section 116-45 of the ITAA 1997. Your capital proceeds will include the amounts you received. You will need to apportion the received capital proceeds across the relevant CGT disposal events. If your allowable capital losses are greater than your capital gains, you have a net capital loss. On the assumption you will have a capital loss, you are entitled to claim a net capital loss from transferring cryptocurrency from your accounts to the unregulated wallet as a result of dealing with the Agency.