The Australian Taxation Office (ATO) has declared that individuals engaged in wrapping or unwrapping cryptocurrency tokens will be subject to capital gains tax (CGT). This tax will apply regardless of the tokens’ market value during the wrapping or unwrapping process. Essentially, any gains or losses resulting from these transactions will now be liable to taxation by the ATO.
A wrapped crypto asset is a tokenised representation of a cryptocurrency or digital asset that maintains a 1:1 peg to the underlying asset. It serves to enhance interoperability within decentralised finance (DeFi).
These assets offer significant advantages in cross-chain interoperability and DeFi applications. They enable users to utilize various features and services across multiple blockchains, facilitating the seamless use of assets from one blockchain on another.
In May 2022, the ATO identified crypto capital gains as one of its primary focus areas. Expanding on this initiative, the Australian tax authority has recently specified various actions subject to taxation within its jurisdiction. According to the ATO’s statement, transferring crypto assets to an address not under the sender’s control or with an existing balance will be treated as a taxable CGT event:
However, the existence of the CGT event depends on whether the individual registers a capital gain or loss. Similar considerations are applied when taxing users, providers, and participants of liquidity pools in decentralised finance, including interest and rewards.
Furthermore, the act of wrapping or unwrapping tokens will now trigger a CGT event, as clarified by the ATO:
“When you wrap or unwrap a crypto asset, you exchange one crypto asset for another, and a CGT event occurs.”
This indicates that regardless of the tokens’ market value at the time, capital gains tax will apply to these transactions.
This development is unsurprising, considering that many countries are instituting frameworks to regulate cryptocurrency operations within their territories.
Australia’s Board of Taxation has scheduled a review of the taxation approach towards digital assets, including insights on cryptocurrency capital gains tax. The findings from this review are expected to be presented to the government by February 29, 2024.
