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Digital gold mutuum

Newbie

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Just as a gold mutuum allows a gold producer to lock in a price for gold they are going to acquire and dispose of in the future, a Bitcoin trader may borrow Bitcoin that is to be repaid in the future.

 

The gold example is discussed in this ruling: https://www.ato.gov.au/law/view/document?docid=TXR/TR925/NAT/ATO/00001&PiT=19920827000001

 

In the gold example, when the borrower makes a principle repayment they are entitled to a portion of a deduction specified in the ruling:

 

"Therefore, a deduction equal to the market value of the principal due to be repaid is allowable as a deduction. The relevant market value is the spot price of gold at the time when the loan is drawn down."

 

This means that for tax purposes they are accounting for the gain or loss they will incur by disposing of trading stock and incurring a deduction that may not equal the current market value when it is realized. This is consistent with the TOFA tax timing realization method.

 

The gold ruling does not discuss tax timing mismatches. How can the borrower account for the outstanding principal at tax time?

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ATO Community Support

Replies 5

Hi @redflowers

 

The principal amount is claimed as a deduction in full (para. 22). This can be claimed when its incurred which is at the time the principal is borrowed. The amount is the qty borrowed multiplied by the spot price at the time the loan is drawn down. A deduction can't be claimed for the repayments of the principle because the deduction for the principle has already been allowed in full. The disposal of the gold to pay the principal will need to be included in assessable income.

 

The example in the ruling explains the above but if I have misread your question please let me know.

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Most helpful response

ATO Community Support

Replies 5

Hi @redflowers

 

The principal amount is claimed as a deduction in full (para. 22). This can be claimed when its incurred which is at the time the principal is borrowed. The amount is the qty borrowed multiplied by the spot price at the time the loan is drawn down. A deduction can't be claimed for the repayments of the principle because the deduction for the principle has already been allowed in full. The disposal of the gold to pay the principal will need to be included in assessable income.

 

The example in the ruling explains the above but if I have misread your question please let me know.

Newbie

Replies 4

*** Edited by moderator ***

Newbie

Replies 3

Hi @AriH,


Please ignore the my previous reply. I realized I totally confused things but it was too late to edit it. If you can delete it please do as it might confuse people.

 

I also realized I asked things the wrong way round in my original question (sorry for the confusion). In my original question I should have wrote:

 

--------------------------------------------------


In the gold example, when the borrower makes a principle repayment they dispose of trading stock for a value specified in the ruling (para. 8):


"The trading stock is disposed of for value, and that value is the spot market value of the borrowed gold at the time the loan was drawn down, apportioned over the amounts of gold repaid. "


This means that for tax purposes they are accounting for the gain or loss they will incur by disposing of trading stock for value that may not equal the current market value when it is realized.

 

--------------------------------------------------


Now to a better example:


Let's the price of BTC is $100 and I borrow 1 BTC and it becomes my trading stock. I think this means I acquire the BTC at market value so we have the following:

 

Purchases: $100
Sales: $0
Trading stock: 1 BTC
Loan payable: 1 BTC

 

Now the price of BTC jumps to $200. I then sell the 1 BTC for 2 ETH. ETH are worth $100 each. So we now have the following:

 

Purchases: $100 + $200
Sales: $200
Trading stock: 2 ETH
Loan payable: 1 BTC

 

In this case I haven't made any profit yet so am not expecting to pay any tax. I owe someone 1 BTC and it is worth $200. I also have trading stock worth $200.

 

For the sake of completeness, let's say I now sell the 2 ETH for 1 BTC and repay the loan. This generates $100 in sales even though the current spot price is $200 as per the ruling (para. 8):


"The trading stock is disposed of for value, and that value is the spot market value of the borrowed gold at the time the loan was drawn down, apportioned over the amounts of gold repaid. "


Purchases: $100 + $200 + $200
Sales: $200 + $200 + $100
Trading stock: 0
Loan payable: 0

 

Taxable = Sales ($500) - Purchases ($500) + Closing stock ($0) = $0

 

This is what I expect, and is consistent with the gold example. I haven't made any profit and don't owe any tax. So everything makes sense.

 

But let's say I don't repay the loan because my loan principle isn't due yet and it is tax time. This results in the following:

 

Purchases: $100 + $200
Sales: $200
Trading stock: 2 ETH
Loan payable: 1 BTC

 

Taxable = Sales ($200) - Purchases ($300) + Closing stock ($200) = $100

 

So unless I repay the loan before tax time, I would be paying tax on $100 when I haven't yet made any profit. Infact, this would cause me to be in debt because I would owe more in tax + loan payable than I have all together.

 

I think is what is referred to as a tax timing mismatch. I need some way to account for the loan at end of financial year so I am not paying tax when I haven't actually made any profit.


Any ideas?

ATO Community Support

Replies 2

Hi @redflowers

 

I'm not sure if that would be considered a mismatch because being able to claim a full deduction for the loan more or less balances it out. The profit comes from the increased value of the trading stock. If the value didn't increase then you'd have a $0 profit if you didn't repay the loan. If you did repay the loan then you'd have a loss that you'd carry forward. In saying that, you may want to get in touch with our Early engagement team for advice as they can look into this further for you.

Newbie

Replies 1

Hi @AriH,

 

Thanks for replying.

 

I agree that everything balances out in the long run, it's just not very smooth because of taxation.

 

i.e. In the example above, it seems like I make a gain initially and then make a loss later on when I repay the loan (and therefore would pay more tax initially and later on end up with a tax loss to carry forward which is not very "smooth").

 

The reason this happens is because I am taxed on the change in value of my trading stock at the end of the financial year. But am taxed on the changed in value of my loan when I repay the principle. And these taxation events don't happen at the same time if the loan agreement is in place accross multiple financial years.

 

Is this not a tax timing mismatch?

 

The point of borrowing Bitcoin (to be held as trading stock) rather than purchasing it is to take on less risk.

 

i.e. If I borrow Bitcoin and the price fluctuates, I don't gain or lose. But if I purchase Bitcoin and the price fluctuates, I do gain or lose.

 

For this reason, I thought a TOFA hedge election might be appropriate here, but I wonder if there are simpler ways to acheive the same result.

 

Keen to hear if you have any thoughts.

ATO Community Support

Replies 0

Hi @redflowers

 

I understand what you're saying. Its probably best to go through our Early engagement team to confirm the treatment for you Smiley Happy