Private ruling: The application of the personal use asset exemption to your bitcoin holdings
Date of advice: 15 December 2016
Published: February 2017
Ruling period: Years ending 30 June 20WW, 30 June 20XX, 30 June 20YY and 30 June 20ZZ
Date scheme commenced: 1 July 20VV

Ruling: Q1: Are the taxpayer’s bitcoin held on capital account? | A1: Yes | Q2: Are the bitcoins purchased informally (category 1) personal use assets? | A2: Yes | Q3: Are the bitcoins mined personally (category 2) personal use assets? | A3: Yes | Q4: Are the bitcoins mined in a pool (category 3) personal use assets? | A4: No | Q5: Are the bitcoins purchased on an online exchange (category 4) personal use assets? | A5: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Background ● You have a long-standing interest in computers, in the course of which you became interested in Bitcoin during its very early stages. You were also drawn to Bitcoin as a solution to money issuance in light of the events of the global financial crisis and sub-prime mortgage crisis in the United States. ● When you began to acquire and mine bitcoin, you did so with a view to exploring and learning about the technology and participating in the community associated with Bitcoin. You did not have a view to profit from any future increase in the value of the bitcoins. ● You are not engaged in, and have not been engaged in, any business related to bitcoins. ● You currently hold the majority of the bitcoin you have ever owned. Bitcoin holdings You hold the following categories of bitcoins: 1. bitcoins purchased informally – during the very early stages of Bitcoin’s existence, you purchased bitcoins informally via an Internet discussion board. 2. bitcoins mined personally – during the very early stages of Bitcoin’s existence, you ran the bitcoin mining software on your personal computer, yielding bitcoins. 3. bitcoins mined as part of a pool – you mined bitcoin as part of a 'pool’, where any bitcoins obtained by pool members was split with the others. 4. bitcoins purchased through an online exchange – at a later stage where Bitcoin had matured somewhat as a financial instrument, you purchased a number of bitcoin by depositing Australian dollars to the exchange’s bank account.

Relevant legislative provisions: Income Tax Assessment Act 1997 – Section 70-10(1), | Income Tax Assessment Act 1997 – Section 108-20(2), | Income Tax Assessment Act 1997 – Section 118-10(3)

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 (Cth) ('ITAA97’) unless otherwise specified. | Detailed Reasoning - Question 1 – whether the bitcoins are capital assets: Bitcoin are CGT assets (TD 2014/26). However, it is necessary to consider whether they have 'revenue’ tax consequences which take precedence over the CGT regime (section 118-20 of the ITAA97). You are not carrying on a business. Therefore the bitcoins cannot be trading stock (subsection 70-10(1); see also TD 2014/27 paragraph 14). If bitcoin are acquired as part of a transaction which, while not forming part of a continuing business, nonetheless has a commercial nature, the proceeds of the sale of those bitcoin may constitute ordinary income (TR 92/3 Income tax: whether profits on isolated transactions are income). However, your acquisition of bitcoin does not have such a nature, and so the proceeds of sale are not ordinary income. Therefore your bitcoins are held on capital account and subject to the CGT regime. | Detailed Reasoning - Questions 2-5 – 'personal use asset’ test: A CGT asset is a personal use asset if it is 'a CGT asset... that is used or kept mainly for your (or your associate’s) personal use or enjoyment’. The ATO has not published a view on the definition of 'personal use asset’. The only case law on this definition is Favaro v Commissioner of Taxation (1996) 34 ATR 1. The court considered whether a capital gain arising from the disposal of Italian currency was exempt on the basis that it was 'used or kept primarily for the personal use of [the taxpayer]’ in terms of paragraph 160B(1)(a) of the ITAA 1936, which was the predecessor to subsection 108-20(2). The court held that the phrase 'personal use’ was used 'in contradistinction to use for business or profit making purposes' and that, since the Italian currency was kept 'for the purpose of its being exchanged for Australian currency at a favourable rate’ and the Australian currency obtained by exchanging the Italian currency was 'invested’, the foreign currency was not a personal use asset: (1996) 34 ATR 1, 14-15. The ATO’s tax determination on whether Bitcoin is a CGT asset (TD 2014/26), while not actually ruling on the 'personal use asset’ issue, includes some discussion of the issue in the 'Explanation’ section (paragraphs 18-21). The determination focuses on the purpose for which the bitcoins were obtained in terms of expenditure, and draws a dichotomy between: (a) obtaining bitcoins to use in the short term for private expenditure, and (b) commercial or profit-related purposes such as investment or use as a currency for business expenditure. Paragraph 19 concludes 'Other categories of use conceivably could exist; taxpayers in these cases should seek private rulings.’ The current case falls outside what the ATO had in mind when drafting the TD; the TD does not address the early stages of a cryptocurrency or the acquisition for the purpose of personal fulfilment. Applying the general principles to the case of an individual acquiring early-stage cryptocurrency by way of mining or informal purchase, the appropriate approach in this case is to draw a dichotomy between: (a) acquiring cryptocurrency for the sake of having it, to tinker with, to experience the process and/or to participate in the community, possibly with an incidental thought that the thing might be worth something one day; and (b) a profit or commercial-type purpose, such as speculating on the value of the cryptocurrency or using the cryptocurrency as a long-term store of value (such as personal savings which are intended to be protected from inflation). The above principles must be applied to the particular facts of each case. It is not possible to prescribe that, for example, all bitcoins mined by individuals before a particular date are personal use assets. The legislation requires a case-by-case determination taking into account all of the circumstances of the case. | Detailed Reasoning - Categories 1 & 2: bitcoins purchased informally and bitcoins mined personally: The taxpayer’s purpose in acquiring these bitcoins can only be characterised as a hobby. There was no thought of profit or use as a long-term store of value at that stage. Although there would be some individuals who would have acquired bitcoins at this early stage for the purpose of obtaining a speculative profit, this taxpayer is not one of them. Therefore these bitcoins are personal use assets. | Detailed Reasoning - Category 3: bitcoins mined as part of a pool: These bitcoins are on capital account but are not personal use assets. Regarding the personal use asset issue, the following factors would tend to suggest that these bitcoins are not personal use assets: (a) at the time of acquiring the bitcoins, the taxpayer is no longer required to support the Bitcoin network, as evidenced by the higher difficulty which led to the need to use a pool; (b) a pool involves cooperation in order to obtain something of value, which puts the activity closer to the commercial end of the spectrum rather than the personal. | Detailed Reasoning - Category 4: bitcoins purchased through an online exchange: These bitcoins are not personal use assets. Factors that tend against their characterisation as a personal use asset are: ● At this stage, the Bitcoin market and ecosystem is maturing, as evidenced by the existence of exchanges where bitcoins can be readily bought and sold. ● The amount spent on these purchases, in the context of the taxpayer’s level of income and personal expenditure, makes it unlikely that they represent a balance required for immediate personal living expenses. Given the size of the purchases and the taxpayer’s particular circumstances, it is more difficult to characterise this as part of a hobby; the taxpayer is more likely to have a substantial aspect of seeking an exchange gain or at least storing value, as opposed to personal use or enjoyment. Therefore the bitcoins purchased at this later stage can be distinguished from those acquired in an earlier stage of bitcoin’s evolution. These later bitcoins are not personal use assets.

This notice must not be taken to imply anything about: | ● the binding nature of the private advice issued to the applicant | ● the correctness of other edited versions. | Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.