Aussie Tax Shake-Up: Wrapped Tokens and DeFi Now in the Crosshairs of Capital Gains!

"ATO Confirms Capital Gains Tax on Crypto Products Applies to Wrapped Tokens and Decentralized Lending Protocols"

Australia’s tax authority, the Australian Taxation Office (ATO), has clarified its stance on the capital gains tax (CGT) for cryptocurrency products, including wrapped tokens and token interactions with decentralized lending protocols. In an updated guidance, the ATO stated that capital gains and losses must be reported whenever a digital asset, including non-fungible tokens (NFTs), is sold. The new update also includes wrapped tokens and various DeFi lending and borrowing arrangements, as well as any transfer of crypto assets to an address that the user does not control.

According to the guidance, when a user wraps or unwraps a crypto asset, they are essentially exchanging one crypto asset for another, triggering a CGT event. The capital proceeds for this event are equal to the market value of the wrapped token at the time of the exchange. This also applies to liquidity pools and providers, where a CGT event occurs when depositing or withdrawing crypto assets. Additionally, if a DeFi platform rewards users with crypto assets, a CGT event will also take place.

While the ATO’s guidance is not legally binding and represents its interpretation of the law rather than a court decision or legislation, it could have a significant impact on Australians using DeFi platforms. Critics argue that this interpretation could also extend to transferring tokens to centralized exchanges, potentially discouraging users from engaging in cross-chain interoperability. Michael Bacina, a Digital Assets lawyer at Piper Alderman Lawyers, highlighted the unexpected tax implications of a purely technological function triggering a tax event and tax liability for users.

The CGT is calculated based on an individual’s marginal tax rate, with a 50% discount available if the asset is held for at least 12 months. However, the tax treatment of digital assets, including capital gains tax, is currently under review by Australia’s Board of Taxation. The board is expected to submit its review to the government by February 29, 2024.

This development comes as Australia proposes a new licensing regime for crypto exchanges, with draft legislation expected by 2024. The regulatory landscape for cryptocurrencies in Australia is evolving, and these recent updates from the ATO highlight the need for clarity and guidance for individuals and businesses operating in the crypto space.

Martin Reid

Martin Reid

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