Private ruling: Cryptocurrency
Date of advice: 29 November 2024
Published: 20 January 2025
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: December 20XX

Ruling: Q1: Does a capital gains tax (CGT) event occur when you send your A tokens to the smart contract to enter into the stake? | A1: Yes. CGT event C2 occurs when you send your A tokens to the smart contract to enter into the stake. The capital proceeds for this CGT event is the market value of the A tokens at the time they were sent to the burn address. | Q2: Is the first element of the cost base of the new A tokens received at the end of the staking, the market value of the property given to acquire it, worked out as at the time of acquisition? | A2: Yes. The cost base of the new A tokens is equal to the market value of the original A tokens you gave up, worked out at the time the original A tokens were sent to the burn address. | Q3: Are the additional amounts of A tokens received at the end of the stake assessable as ordinary income under section 6-5 of the ITAA 1997? | A3: No.

Relevant facts and circumstances: You have invested and staked A tokens in the 'A' project. 'A' is a project to recreate a common banking product called a Time Deposit. A is an ERC-20 token and operates as a set of smart contacts on the Ethereum blockchain. When you staked your A tokens they were sent to a burn address and burnt and in return you received B-Shares. The burn address is not owned by anyone and the tokens are not controlled by anyone. The number of B-Shares you acquire depends on the B-Shares' price in 'A' terms, the duration of the stake and the amount of A tokens staked. The B-Shares represent a claim on the staked assets. When staking, you agree to lock up your A tokens for a period. You are not rewarded for validating transactions. B-Shares are not tokenized, transferable or tradeable and remain locked in the stake until the relevant smart contract functions are triggered. At the end of the stake you are minted new A tokens, equal to the amount of A tokens originally committed, plus additional A tokens proportional to the number of B-shares held, called payouts. The payouts received are determined by a combination of the number of B-Shares held, the length of the stake and the penalties paid out during the stake. If you do not end a stake within XX days by the end of the stake date, penalties apply and reduce the stake by X% per week until the penalty consumes the entire stake. There are two alternative actions you can use to end a stake: The payouts are equivalent to the rate of inflation plus the penalties received. The penalties received are related to the number of individuals ending their stake before their time lock expires. 'A' staking includes incentives for larger and longer stakes durations. The exact yield is not known until you perform the relevant function to end the stake; it is only at this point the exact amount of penalties received during the stake period is known. You have provided information detailing your 'A' staking transactions.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 109-10 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Paragraph 110-25(2)(b) | Income Tax Assessment Act 1997 Sub-Paragraph 116-30(2)(ii)

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 102-20 of the 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. CGT assets include part of or an interest in 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 tax treatment of bitcoin can be applied to other crypto or digital currencies that have the similar characteristics as bitcoin. Guidance on www.ato.gov.au provides that there are many types of crypto assets, with their form and function continuing to evolve. You can control different types of crypto asset in the same digital or hardware wallet. However, for tax purposes you need to treat each crypto asset you hold as a separate asset. When you stake tokens, a stake account is created and the tokens are locked up. The stake account is delegated to a validator. When you unstake your tokens the stake account needs to be deactivated and then you withdraw your tokens from the stake account. You do not lose ownership of the tokens but are precluded from trading with them. In return you can receive rewards from locking your tokens. However, the 'A' project operates differently. The 'A' project involves rewarding token holders, not the miners or validators. Users stake their A tokens by committing to hold their tokens for predetermined periods. Users lose ownership of the A tokens and are given B-Shares that represent their staked A tokens. However, these B-Shares are not tokenized, transferable or tradeable and remain locked in the stake until the relevant smart contract functions are triggered. Upon completion, the users receive their staked funds plus an 'A' reward. | Detailed Reasoning - CGT Event A1: CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner (subsection 104-10(2) of the ITAA 1997). In the circumstances under consideration, upon engaging the function of the smart contract to stake A tokens, the immutable code of the smart contract sends the A tokens to an address that does not have a private key (i.e. a burn address). Burning involves a one-way transaction. It is not possible for any party to ever access the tokens in the burn address. While it may be the case that the purported entity referred to as "A" created the smart contract, it still does not follow that the purported entity becomes the owner of the staked A tokens at any stage. There would be no basis to imply a contractual term transferring ownership of the A tokens to the purported entity as the staking arrangement can function without implying such a term (i.e. it is not necessary to give effect to business efficacy). In the absence of an express contractual term transferring ownership to the purported entity (i.e., in the terms and conditions), there has been no change of ownership to another entity. There are no facts that demonstrate that an entity takes ownership of the A tokens once they are sent to the burn address. Therefore, CGT event A1 does not occur. | Detailed Reasoning - CGT Event C2: While CGT event A1 will not occur upon the sending of the A tokens to the burn address under the facts of this arrangement, CGT event C2 would occur. Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) Being redeemed or cancelled; or (b) Being released, discharged or satisfied; or (c) Expiring; or (d) Being abandoned, surrendered or forfeited; or (e) If the asset is an option - being exercised; or (f) If the asset is a convertible interest - being converted. We consider that your ownership of the A tokens has ended by being abandoned, surrendered or forfeited as the tokens have been burnt and removed from circulation with no possibility of recovery. The A tokens no longer have the character of a CGT asset in the burn address and have therefore ended for the purpose of subsection 104-25(2) of the ITAA 1997. The property interest in a crypto asset comes to an end when the value inherent in it is transferred to another asset; Ruscoe v Cryptopia Ltd (in liq) [2020] NZHC 728 at [117]; Re Blockchain Tech Pty Ltd [2024] VSC 690 at [386]. Sub-paragraph 116-30(2)(ii) of the ITAA 1997 provides that the capital proceeds are the market value of the A tokens burnt, being the CGT assets that are the subject of CGT event C2. | Detailed Reasoning - Question 2: Your original A tokens were sent to a burn address and are taken permanently out of circulation. Therefore, when you obtain new A tokens after completing the end stake function, these cannot be the same assets you originally had. When you receive the new A tokens you acquire a new CGT asset. In regard to the cost base of the new A tokens, under section 110-25 of the ITAA 1997, the cost base of a CGT asset consists of 5 elements, including, relevantly, the first element at subsection 110-25(2) of the ITAA 1997: (a) The money you paid or are required to pay, to acquire the asset, and (b) The market value of any property you gave or are required to give, in respect of acquiring it (worked out as at the time of the acquisition) The original A tokens are considered to be property given for the purposes of paragraph 110-25(2)(b) of the ITAA 1997. Your entitlement to the new A tokens is contingent on your ownership of the original A tokens ending. Therefore, the new A tokens would have a cost base equal to the market value of the original A tokens worked out at the time the new A tokens were acquired. For an asset you don't acquire from another entity, you are generally taken to acquire it when you start working on the creation of that asset (Section 109-10 of the ITAA 1997). We consider that the acquisition date is the time you sent your original A tokens to the burn address (i.e. being the first step in creating the new A tokens). | Detailed Reasoning - Question 3: Despite the descriptions adopted by the 'A' project, including references to 'staking', it would appear that the relevant activities are significantly different to those considered in the Commissioner's general guidance on staking rewards. It does not appear that this form of 'staking' facilitates a consensus mechanism that validates transactions. Moreover, the 'staked' A tokens are sent to a burn address. Subsection 6-5(1) of the ITAA 1997 states that 'your assessable income includes income according to ordinary concepts, which is called ordinary income'. Subsection 6-5(2) of the ITAA 1997 further states that 'if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year'. Subsection 6-5(4) of the ITAA 1997 clarifies that 'in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct'. The additional A tokens are not income from providing services as this form of 'staking' does not involve the validation of transactions. The facts do not indicate that you have undertaken an isolated transaction attracting the principles in FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363 and set out in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income . Nor are you carrying on a business. The additional A tokens are not income from holding property as the original A tokens were burnt upon entering into the stake and no longer existed from that point. The B-Shares you have received in return for sending the A tokens to the burn address, cannot be traded, assigned or otherwise dealt with in their own right. They can only be used by you to perform the stake function or allowed to lapse without compensation or consideration. At the end of the arrangement, you receive new A tokens that are meant to represent the amount of the original A tokens sent to the burn address, plus additional A tokens that represent a payout and that is calculated based on the length of time your A tokens have been out of circulation. However, how these staking rewards are derived is significantly different to traditional/native staking rewards where the staked assets are returned to the user. The general proposition that a gain derived from property has the character of income is less applicable where the property does not remain intact; Commissioner of Taxation v Noza Holdings Pty Ltd [2012] FCAFC 43 at [44]. The additional A tokens do not have the obvious characteristics of ordinary income. Therefore, the additional A tokens received are not assessable income under section 6-5 of the ITAA 1997. | Summary: CGT event C2 occurs when you send your A tokens to the smart contract to enter into the stake. The capital proceeds for this CGT event is the market value of the A tokens at the time they were sent to the burn address. The receipt of new A tokens when the stake ends is the acquisition of a new CGT asset. The cost base of the new A tokens is equal to the market value of the original A tokens you gave up, worked out at the time the original A tokens were sent to the burn address. The additional amounts of A tokens received at the end of the stake are not assessable as ordinary income.

Using the End Stake (ES) function on the smart contract, where the smart contract calculates the payouts, mints new A tokens and credits them to you. | Using the Good Accounting function, which gives you the option to safely end a mature stake and avoid incurring penalties but does not mint new A tokens. You can use the ES function at a later date to finalise the stake and receive new A tokens.