ATO Clarification Efforts: Decentralized Finance and CGT Implications
ATO has faced challenges in explaining unclear aspects of its recent guidance, suggesting that capital gains tax (CGT) might apply to various standard decentralized finance transactions.
The guidance released on November 9 by the Australian Taxation Office (ATO) indicates that CGT obligations arise when tokens are moved to an alternate address or smart contract without “beneficial ownership” or when the address holds tokens with a non-zero balance.
The ATO’s examples of DeFi activities triggering a CGT event include exchanging one cryptocurrency for a commitment to receive an equivalent amount in the future, providing liquidity to a protocol, token wrapping, and lending assets.
The criteria imply that the regulations might cover activities like liquid staking, such as staking Ether (ETH) on Lido, or transferring tokens using a layer 2 bridge, although this remains unclarified.
When directly asked, an ATO spokesperson mentioned that the tax implications of a transaction depend on the actions taken on the platform or contract, as well as the specific circumstances surrounding the taxpayer who owns the cryptocurrency assets.
This lack of a clear response leaves investors unable to comply with potential unintended consequences of the vague new guidelines, which have not undergone legal testing.
In a CGT event, if an Australian DeFi user bought ETH for $100 and later staked it or sent it via a bridge to an L2 when the price surged to $1,000, they would be liable to pay tax on the $900 “profit,” even without selling the ETH or realizing an actual profit.
Liberal Party Senator Andrew Bragg informed CoinTelegraph that the previous government had tasked the Board of Taxation with proposing suitable cryptocurrency taxation rules. However, the release of these findings has been delayed twice and is now expected in February of the following year.
“In absence of legislation, the ATO has been allowed to make up the rules on their own,” Senator Bragg stated.
He expressed that the failure of the Labor government to release these findings has led to intricacies and doubts among Australian crypto users.
According to Danny Talwar, Koinly’s head of tax, using a bridge for a transfer might trigger a CGT event, depending significantly on whether there was a shift in beneficial ownership.
ATO’s Stance on CGT and Liquid Staking Sparks Debate in DeFi Community
Additionally, he noted that the ATO considers liquid staking a CGT event, treating it as a crypto-to-crypto transaction involving the exchange of Ether for another token.
Matt Walrath, founder of Crypto Tax Made Easy, believes that the ATO lacks a comprehensive understanding of DeFi and has labeled the new regulations as “aggressive.” He further commented that these rules create additional challenges for Australian DeFi users engaging in staking and transferring funds to layer 2 blockchains.
He expressed that the rapid developments within DeFi outpace the authorities’ grasp, indicating a lack of understanding about the true nature of these transactions.
Walrath contested the notion that beneficial ownership shifts during interactions with liquid staking services, suggesting that this absence means no CGT event should occur. He clarified that stakers retain the ability to withdraw funds at any time, emphasizing that the staked tokens technically remain within the user’s wallet.
He illustrated his point by comparing it to a mortgaged house, stating, “although the bank might own my house when I mortgage it, I’m still the beneficial owner. I can rent that house out and derive the income from it. I’m the one who can enjoy it by living.”
He then pointed out that the fresh regulations concerning wrapped tokens don’t encompass “economic substance.”
He elaborated by stating, “wrapped Bitcoin is economically similar to Bitcoin and therefore there is a question as to whether a CGT event has occurred.”
Walrath emphasized the necessity for more individuals within the Australian crypto community to advocate for rational tax legislation.
Big few months coming up for regulation in Australia.
