The LUNA crash
In April 2022, LUNA traded at an all time high of USD 119.2. A month later, and LUNA had plummeted losing over 99.9% of its value, leaving LUNA investors in crisis.
LUNA is the native crypto of the Terra ecosystem and the LUNA crypto crash was caused due to its connection with its sister token TerraUSD (UST), the algorithmic stablecoin of the Terra blockchain.
đĄ Stablecoin
A stablecoin is a cryptocurrency that is designed to have a stable price relative to a specified reference asset such as USD. For example, 1 USDT is a stablecoin that is intended to have the same price as 1 USD.
Many stablecoins maintain the stable price by backing the stablecoin 1:1 with the underlying fiat currency. Users are able to redeem 1 unit of the stablecoin for 1 unit of the underlying reference asset which results in the stable price.
Some stablecoins, such as UST have no formal backing, meaning its value is not backed by real assets. For UST, the stablecoin was backed by its sister token LUNA, and the Terra protocol used a unique algorithm to maintain the value of 1 UST = 1 USD. In short, the Terra protocol used the LUNA token to absorb volatility from the system.
Without getting too technical, 1 UST could be exchanged for 1 LUNA at any time. So if the price of UST rose above 1 USD, the algorithm minted more LUNA to stabilise the value of UST at $1 and vice versa.
However, this burn and mint mechanism didnât last long. Around 7 May 2022, large withdrawals and sell-offs of UST are believed to have triggered the downward spiral of this crypto duo. Due to the large sell-offs, UST eventually lost its 1:1 peg with the US dollar and panicked investors started to liquidate their positions and sell their UST. This also caused the price of LUNA to crash at a very fast rate.
The rapid drop in the value of LUNA, along with the de-pegging of UST, ultimately led investors to lose confidence in the project and the price of LUNA continued to crash till it was near worthless.
So where does this death spiral of LUNA leave the investors who still hold LUNA?
The birth of LUNA 2.0
Following the crash of the sister tokens, the co-founder of Terraform Labs (the company that developed the Terra blockchain), Do-Kwon, came up with a plan he called âa chance to rise up anew from the ashesâ by introducing a reboot called LUNA 2.0 around June 2022. The new LUNA 2.0 now commonly trades under the ticker symbol LUNA.
The new rebooted LUNA 2.0 was on a completely new ecosystem and a new blockchain. The new blockchain called Terra does not have any stablecoins or algorithmic stablecoins.
As a result of the crash, the old crypto tokens TerraUSD (UST) and LUNA have been renamed and are now commonly referred to as TerraClassicUSD (USTC) and LUNA Classic (LUNC), respectively. Both of these cryptocurrency tokens still continue to trade on many exchanges but at a nominal value.
To incentivise investors, new LUNA 2.0 tokens were airdropped to pre and post-crash holders of LUNC, USTC and several developers of the Terra blockchain.
Tax implication of LUNA, LUNC, UST and USTC for Australians
The tax implications for LUNC and USTC will depend on what you have done with the original assets.
You have already sold your LUNC and USTC
If you have sold LUNC or USTC, then it is a disposal event that will result in a capital gain or loss if you are an investor.
Capital gains and losses from your crypto must be reported in your income tax return in the income year that the disposal occurred.
If the price of your LUNC or USTC dropped from when you originally purchased it, then it will result in a capital loss that you can claim.
Capital losses can be claimed and used to offset other capital gains that you might have for that income year. If you have more capital losses than you have capital gains, then you can hold on to the excess capital losses and carry them forward to future financial years for later use.
You still hold near-worthless LUNC and USTC
If you werenât able to sell your old LUNA or UST tokens before the crash, then you are probably holding the old tokens, now renamed to LUNC and USTC. Although the ticker symbol has been renamed, it still remains the same original cryptocurrency.
As you have not yet disposed of your tokens, you are likely sitting on unrealised capital losses. Typically, the capital gains tax rules in Australia require investors to dispose of an asset before claiming a capital loss. Disposing of LUNC and USTC may have some practical difficulties, considering the lack of liquidity for the tokens.
Realising capital losses on LUNA
For similar comparison, we look at how the ATO treats shares that are declared worthless under the capital gains tax rules.
Capital loss for worthless shares
The ATO allows you to claim a capital loss for worthless shares before a company is deregistered, if the liquidator or administrator declares in writing that there is no likelihood that you will receive any further distribution from the company.
In such cases, the ATO allows you to claim a capital loss equal to the reduced cost base of the shares (usually what you paid for the shares) at the time of the declaration.
This view is reinforced by Taxation Determination TD 2000/7 Income tax: capital gains: when does a CGT event happen to shares in a company, for the purposes of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997, if the company is deregistered under the Corporations Law?
To claim a worthless asset or crypto, there likely needs to be evidence or documentation that it has no value, or a letter from the company saying it has ceased operations.
As of now, LUNC and USTC are still trading and there is no official declaration from Terraform Labs yet.
Without clear guidance from the ATO on claiming capital losses on worthless crypto assets, it is safer if a clear disposal event has taken place. Letâs look at some of the common disposal events that would result in the realisation of a capital loss/ gain.
Sell your tokens to realise a capital loss
The most reliable way to realise a capital loss on your LUNC and USTC, is to sell the tokens on an exchange or decentralised exchange where they are still trading.
This will become more challenging if the liquidity for these crypto assets continues to dry up. Many exchanges have already delisted LUNC and USTC, making it hard for investors to realise a capital loss.
Gift your tokens to friends or family to realise a capital loss
A CGT disposal event happens whenever ownership of the asset changes, such as when crypto is gifted to another person. If you gift your LUNC or USTC to friends or family, then any unrealised capital loss will be realised.
Gifting crypto is seen as a CGT event and allows you to claim the resulting capital gain/ loss for doing so.
The person receiving the gift is not taxed at the time of receiving it. Thanks to the market value substitution rule, they get to record the cost base of the gifted asset at market value at the time of the transaction. They will also be responsible for declaring any resulting capital gain or loss when they do eventually dispose of the gifted tokens at some point in the future.
Send your tokens to a burn wallet to realise a capital loss
Sending tokens to a burn address is another way that likely results in a CGT event.
A capital loss can be claimed under section 104-20 of the ITAA 1997, CGT event C1 Loss or destruction of a CGT asset.
TD 1999/79 provides some guidance on the ordinary meaning of destroyed and highlights that it can be a voluntary action that is âto reduce to pieces or to a useless formâ.
Sending your tokens to a burn wallet effectively removes them from circulation permanently and ensures that they can no longer be functionally used. Many would consider the cryptocurrency to be destroyed, and if so, it would result in a CGT event allowing a capital gain/ loss to be claimed.
In May 2022, Do-Kwon, the co-founder of Terraform Labs provided a burn address, as part of a burn program, for those wishing to engage down this path. However, you must remember that burning tokens is an irreversible process and relinquishes all access and ownership rights to your tokens.
There is a burn tracker on Terrarity, that shows how many LUNC tokens have been burned and permanently removed from circulation.
Continue to hold your LUNC and USTC
If you still believe in the future of LUNC and USTC, then, you may want to continue holding on to your tokens with the hope that the tokens may bounce back and regain value in the future.
If you do decide to hold on to your tokens, then there is no CGT event, and no capital loss will be realised. If in the future, the tokens do increase in price and you make a profit, then you will need to report the resulting capital gain in the financial year it occurs.
Key takeaways
To claim a capital loss for your LUNC and USTC, there must be a disposal of your crypto, where you either sell, gift, burn or otherwise initiate a CGT event resulting in a capital loss.
For LUNC and USTC investors who are still holding on to their crypto, they currently hold a nominal value and limited liquidity is available for trading. As LUNC and USTC are still trading on at least some exchanges, they cannot be considered worthless and written off.
If you wish to claim a capital loss for LUNC and USTC, you have to dispose your crypto to realise a capital loss in that income year. Until such action is taken by you, you still own your LUNC and USTC crypto and most likely have unrealised capital losses.
