I have performed some margin trading with cryptocurrency this financial year, and unlike spot trading (capital account) and futures trading (revenue account CFDs), there does not appear to be much guidance on the matter. I have read through the ATOs law database and associated private rulings, and many matters primarily concern sole trader / business classification and the handling of CFDs relating to cryptocurrency. I understand that if all the requirements are met, it is possible to classified as a sole trader, and thus valuation of trading stock is of importance. However, if this is not the case, I want to understand how this should be treated. I will try and explain the circumstances carefully below.
The Premise
The platform provides a means to deposit cryptocurrency which is credited to an account it offers spot, margin, and futures trading. To participate in margin trading, funds must be transferred into a ‘margin' wallet where they represent ‘collateral' for borrowing. A user is then able to open a ‘position', either ‘long' or ‘short', which borrows funds using the peer-to-peer margin funding functionality of the platform.
Behind the scenes, the required funds (i.e. USD, BTC, etc) are borrowed at the market rate of funding (by default), or a user can negotiate specific rates by bidding for funding at a specified daily rate (%) and a given period. Throughout a position's lifetime, the necessary margin funds are continually maintained (either automatically or by user negotiation), and interest payments occur.
Each market pair only permits a single position (either ‘long' or ‘short') and P/L is only payable once the position has been closed out this can by done by executing a trade in the opposite direction, or ‘claiming' a position.
The Question
My uncertainty relates to the point at which a taxable event occurs in the process of margin trading I will use examples to illustrate:
Example I ‘Long position'
- Deposit 0.5 BTC on the exchange and transfer to ‘margin wallet' to use as ‘collateral'
- Open a ‘margin long' position by purchasing 1 BTC (negotiating $30,000 USD funding behind the scenes), using the original deposit as collateral position base price is $30,000/BTC
- BTC price rises to $40,000 USD i.e. unrealised P/L is now $10,000 USD (minus borrowing & trading fees) on the position
- Sell 0.5 BTC associated with the position (so only 0.5 BTC remaining), reducing the base price on the position to $20,000/BTC at this point no profits have been credited
- BTC price rises to $45,000 USD where the remaining portion of the position is closed; USD profit is credited to account
In this example, the final amount credited to the account is $12,500 USD (minus associated borrowing & trading fees). My question is in relation to the reduction of the position in Step IV is this a taxable event and does it need to be account for? Alternatively, is it sufficient to convert the realised profit of the position at the end to AUD (deducting associated fees) and add it to the appropriate account.
Example II ‘Short position' (short selling)
- Open a ‘margin short' position by selling 1 BTC (negotiating 1 BTC funding behind the scenes), using the original deposit as collateral position base price is $45,000/BTC
- BTC price drops to $40,000 USD i.e. unrealised P/L is now $5,000 USD (minus borrowing & trading fees) on the position
- Buy 0.5 BTC associated with the position (so only -0.5BTC remaining), increasing the base price to $50,000/BTC no profits credited at this point
- BTC price drops further to $30,000 USD where the remaining portion of the position is closed; USD profit is credited to the account
In this second example, the final amount credited to the account is $10,000 USD (minus associated borrowing & trading fees). Is the reduction in the position in Step III a taxable event and needs to be accounted for or is the realised profit on position close (deducting associated fees) valid to use?
If it is the case that reductions in position are taxable events (even though profits are not realised & credited by the exchange), how are more complex cases of reducing/increasing positions (both within the same) to be handled? In particular, with regards to the 'short selling', I find it difficult to account for this under CGT provisions.
Alternatively, is it possible (seems unlikely) this would be considered under the CFD provisions (guidance by TR 2005/15) - however there are conflicting factors regarding the requirements (and that this margin arrangement is effectively traded against the 'underlying' spot market):
- 'without ownership of the underlying' (3) - how is this lending arrangement considered?
- 'contract is cash-settled' (6) - some pairs pay profit out in cryptocurrency
Any help would be much appreciated
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