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Re: Trading stock rules for cryptocurrency

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If my business borrows cryptocurrency to use for staking, does this borrowed cryptocurrency get counted in trading stock?

 

E.g. I borrow 96 ether for $5000 on 01/08/2021 for 1 year. Between 01/08/2021 and 30/06/2022 I make 5 ether from staking these borrowed ether - at the end of the financial year lets say this 5 ether is worth $15,000. My other costs are an additional $5000 (hardware/server costs etc.)

 

How much tax does the business pay? 

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ATO Community Support

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Hi @AndMyTax

 

While we don't have a specific ruling on borrowing crypto for your business, we do have a taxation ruling on borrowing gold for your business (TR 92/5). The same principles will apply.

 

When you borrow the crypto, it becomes trading stock. The cost of the trading stock is the loan's promise to repay the principal crypto. The value of the loan is the market value at the time the crypto is transferred to you.

 

The repayment is then a disposal of trading stock. The value of its disposal is the original value of the loan (even if it has since changed in value).

 

This means that in your example:

 

You borrow 96 Ether worth $5,000. This becomes $5,000 value of trading stock. You would report this increase in trading stock as assessable income on your tax return.

 

You also gain 5 Ether. How you value this additional stock is up to you (you get to choose one of three methods). If you use the replacement value method, you'd include that $15,000 of this Ether in the assessable income.

 

You have said you have $5,000 of deductions.

 

This boils down to $20,000 of trading stock, and $5,000 of deductions. This means you'd have $15,000 of taxable income for the 2022 financial year.

 

How much tax the business pays depends on the entity type, to start with. If you're an individual trader, you'll be taxed according to your marginal income tax rates.

 

You can read the Taxation Ruling 92/5 on borrowing gold for your business on our legal database, and about methods for valuing trading stock on our website.

 

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Most helpful response

ATO Community Support

Replies 1

Hi @AndMyTax

 

While we don't have a specific ruling on borrowing crypto for your business, we do have a taxation ruling on borrowing gold for your business (TR 92/5). The same principles will apply.

 

When you borrow the crypto, it becomes trading stock. The cost of the trading stock is the loan's promise to repay the principal crypto. The value of the loan is the market value at the time the crypto is transferred to you.

 

The repayment is then a disposal of trading stock. The value of its disposal is the original value of the loan (even if it has since changed in value).

 

This means that in your example:

 

You borrow 96 Ether worth $5,000. This becomes $5,000 value of trading stock. You would report this increase in trading stock as assessable income on your tax return.

 

You also gain 5 Ether. How you value this additional stock is up to you (you get to choose one of three methods). If you use the replacement value method, you'd include that $15,000 of this Ether in the assessable income.

 

You have said you have $5,000 of deductions.

 

This boils down to $20,000 of trading stock, and $5,000 of deductions. This means you'd have $15,000 of taxable income for the 2022 financial year.

 

How much tax the business pays depends on the entity type, to start with. If you're an individual trader, you'll be taxed according to your marginal income tax rates.

 

You can read the Taxation Ruling 92/5 on borrowing gold for your business on our legal database, and about methods for valuing trading stock on our website.

 

Initiate

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Thankyou for the reply @BlakeATO 

I meant the cost to borrow the 96 ether was $5000 (let's say it was 2%, so the 96 ether at time of borrowing has a 'spot' price of $250,000 or $2604.17 per ether). 

 

The link you gave mentions "The gold is acquired for the purpose of sale and will therefore fall within the subsection 6(1) definition of trading stock because the business of the producer/borrower is or includes that of trading in gold."
In this case the business would not be acquiring the crypto for the purpose of sale, it is aquiring the crypto for the purpose of generating income from the crypto (more like, I'm a gold store that borrows a 100kg gold coin from the Perth Mint, store it in a secure room and charge 1g gold for entry - I have borrowed and will return the coin but generate income (more gold) from holding it. I'll sell the 1g gold income but not the 100kg coin).

 

Does this change things?

Also, it mentions that the producer/borrower is therefore entitled to a deduction for the acquisition of the borrowed gold. The cost incurred by producer/borrower in acquiring the borrowed gold (the 'principal') is the promise to repay the quantity of gold borrowed and any gold fee required by the contract.

When would this deduction be applied? When the 96 crypto is returned?
i.e. if I borrow the 96ether on July 1st for 11 months, so that both the borrowing and returning is in the same financial year (pay back June 1st), would this mean it would effectively cancel each other out, and I'd be left with:
$5000 deduction for hardware/office etc.
$4583.33 deduction for interest paid (changed from $5000 for being an 11 months loan)
$15,000 replacement value of crypto earnt as income through staking
= tax on $5416.67


But if it was 13 months and the repayment is next financial year, would this financial year's tax be
$5000 deduction for hardware/office etc.
$5000 deduction for interest paid
$15,000 replacement value of crypto earnt as income through staking
$250,000 trading stock value
= tax on $265,000? (Seems counterintuitive to tax someone on $265,000 when thay have only derived $15,000 before deductions, of income)

 

 

ATO Community Support

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Hi @AndMyTax

 

Our Early engagement team should help with this. They will be certain to recommend a private ruling where our current advice is unclear.