Jack Jones works as a commercial manager in a logistics company. To supplement his income, he undertook
Question:
Jack Jones works as a commercial manager in a logistics company. To supplement his income, he undertook crypto trading on his regularly rostered days off. His initial investment was from his personal bank account (mostly coming from a $350,000 inheritance). His trading activities were primarily out of his home office; however, he could trade wherever he brought his laptop. To assist with his research insights, he subscribed at great expense to online crypto forums, paid newsletters, and one-on-one tutoring from crypto influencers.
Jack was relatively successful in his years of crypto investing. In fact, he made as much money from his crypto investment as he did from his regular job. However, Jack worked as a Commercial Manager within a family business and couldn't ever consider leaving the role unless it was for reasons of retirement.
His business plan was outlined in a half-page document that described how he would target undervalued coins. At the bottom of his business plans was a table with how much he needed to earn to be able to retire early in the next 5 to 10 years. To instils discipline in his trading activities, he had certain risk parameters to ensure he minimized downside risk with each trade. Jack wasn't very good with paperwork and didn't keep complete records of his trades. He used MYOB accounting software to organize his accounting financials. His accountant later told him that the statements weren't entirely accurate.
In his first year of investing, he placed 72 trades evenly throughout the year. In his second year, he placed 113 trades mostly across the summer months, in his third year he placed 274 trades mostly across the winter months, and in his fourth and most recent year of trading, he placed 34 trades evenly across the year. At any point in time, he never held more than 14 coins in his portfolio.
Ager his third successful year of investing, Jack decided it was a good time to get on the property ladder. Luckily for Jack, he noticed two large parcels of land for sale near the apartment he was renting. Acting rapidly, Jack decided to make an offer on both these parcels of land (Parcel A and B respectively). Jack's offer was accepted and he immediately set to work subdividing the land into four (4) equal-sized lots (A1, A2, B1 and B2) and began constructing prefabricated demountable houses (PDH) on each lot.
Unfortunately for Jack, many of his investments were stored in the FTX exchange, with his personal bank account with the Silicon Valley Bank, both collapsing in early 2023. Jack incurred significant losses in the most recent financial year.
Although Jack was inclined to rent out each house once constructed, the houses attracted much interest from the local market. To try and make up for his losses, Jack sold lots A1, A2 and B1 (less than 12 months after purchasing them) in the most recent financial year. Unfortunately, the sale of the B2 did not go through as the purchasers pulled out. Jack decided to rent out the unsold lot to get a bit of cash in the door. Jack is undecided whether he will sell lot B2 eventually or rent out the property for another few years, however, his preference is to make a quick sale.
Jack prepared his tax returns for the first three years of trading on the basis that he was a passive investor holding the investments in 'capital account'. He didn't turn his mind to whether this was his actual position, he simply followed what everyone else was doing via the various forums and newsletters that he read. However, in recent editions of the newsletters, there was a lot of chatter that if investment activities could be characterized as being on the 'revenue account', investors may be able to deduct those significant losses against current and future income from his employment as a Commercial Manager. :
Jack's previous accountant couldn't help and is now seeking assistance from you in respect of his tax returns. Jack has asked you to prepare a letter of advice on the following:
- What, if any amounts should be included as assessable income?
- What, if any amounts should be allowed as deductions?
- What, if any transaction would be subject to Capital Gains Tax (CGT)?
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher