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Exploring Crypto News: ATO Rules On DeFi Capital Gains Tax

Australia’s tax agency won’t clarify its confusing, ‘aggressive’ crypto rules

35 Listen to this article The Australian Tax Office (ATO) recently issued guidance on Decentralized Finance (DeFi) transactions, but the […]

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The Australian Tax Office (ATO) recently issued guidance on Decentralized Finance (DeFi) transactions, but the specifics regarding capital gains tax (CGT) applicability to certain DeFi activities remain unclear. This ambiguity has left many in the Australian DeFi community uncertain about how to comply with these new tax rules.

Key points of confusion center around whether CGT applies to liquid staking, such as staking Ether on platforms like Lido, and transferring funds through bridges to layer 2 networks. The ATO’s guidance states that CGT is payable when tokens are transferred to another address or smart contract where the individual does not maintain “beneficial ownership.” Examples provided by the ATO that may incur CGT include exchanging one crypto asset for a future right to receive an equivalent number of the same asset, providing liquidity, wrapping tokens, and loaning assets. However, the ATO has not explicitly clarified if these rules apply to liquid staking or layer 2 bridge transfers.

When directly questioned by Cointelegraph, the ATO responded ambiguously, stating that the tax consequences depend on the specific actions taken on the platform or contract and the individual circumstances of the cryptocurrency asset owner. This lack of clarity has left investors unsure about compliance and the potential for unintended tax consequences.

Under the new guidance, a CGT event could occur if a DeFi user in Australia purchases ETH at $100 and then stakes it or transfers it via a bridge to a layer 2 network when its value is $1,000. The user would be liable to pay tax on the $900 increase in value, despite not having sold the ETH or realized a profit.

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Senator Andrew Bragg of the Liberal Party criticized the government for its delay in releasing findings from the Board of Taxation on appropriate rules for taxing cryptocurrency. He attributed the complexity and uncertainty facing Australian crypto users to the Labor government’s delay in releasing these findings and the ATO’s subsequent action in creating rules independently.

Danny Talwar from Koinly suggested that transferring via a bridge could result in a CGT event, especially if there’s a change in beneficial ownership. He also believes liquid staking would be considered a CGT event since the ATO views it as a crypto-to-crypto transaction.

Matt Walrath, founder of Crypto Tax Made Easy, criticized the ATO’s understanding of DeFi, labeling the new rules as “aggressive.” He contended that beneficial ownership is not transferred in liquid staking services, as users can withdraw funds anytime and the tokens technically remain in the user’s wallet. He compared it to a mortgaged house, where the bank may hold the title, but the homeowner retains beneficial ownership.

Furthermore, Talwar commented on the ATO’s stance on wrapped tokens, questioning whether a CGT event occurs due to the economic similarity between wrapped tokens and their underlying assets. Both Talwar and Walrath called for greater advocacy within the Australian crypto community for more sensible tax laws.

FAQ’s

What are the new crypto tax rules in Australia?

Australia’s tax authority mandates capital gains tax on a range of DeFi transactions, including token transfers to addresses without beneficial ownership and activities like liquidity provision, wrapping tokens, and loaning assets.

Does staking Ether on Lido create a CGT event in Australia?
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While not explicitly clarified by the ATO, the criteria suggest that liquid staking, like staking Ether on Lido, may be considered a CGT event.

Are there any exceptions or discounts to this tax rule?

The tax is based on an individual’s marginal rate, but a 50% discount is available if the asset is held for 12 months.

How has the crypto industry reacted to these rules?

The crypto industry is largely disappointed, citing the rules’ complexity, lack of clarity, and potential to hinder the growth of the crypto sector in Australia.

When is the Australian Board of Taxation expected to review these tax treatments?

The Board of Taxation is scheduled to provide its review, including comments on capital gains tax, to the government by February 29, 2024.

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