The Australian Taxation Office has clarified its position that capital gains tax on crypto products also extends to wrapped tokens or token interaction with decentralized lending protocols, according to a updated guidance.
Last year the Australian Taxation Office (ATO) warned cryptocurrency investors that capital gains and losses must be reported every time a digital asset, including non-fungible tokens (NFT), is sold. The latest update includes wrapped tokens or many “DeFi lending and borrowing schemes” or, in general, any time you transfer a crypto asset to an address over which you have no control.
“When you pack or unpack a crypto asset, you exchange one crypto asset for another and a CGT (capital gains tax) event takes place, the update said. “The capital return for the CGT event is equal to the market value of the wrapped token at the time of the exchange.”
This includes liquidity pools and providers where a CGT event occurs when you deposit or withdraw crypto assets from the liquidity pool, according to the guidelines. A CGT event will also occur if a DeFi platform pays you rewards in the form of crypto assets.
This move could have a chilling impact on Australians using DeFi, even though it is a non-binding directive from the tax office representing that tax office’s interpretation of the law, meaning it is not the same as a court decision or legislation . It has also drawn criticism from the country’s crypto industry, with one lawyer saying this could also apply to transferring tokens to centralized exchanges.
“Being able to package tokens is a valuable and necessary tool for cross-chain interoperability,” said Michael Bacina, Digital Assets attorney at Piper Alderman Lawyers. “Having a purely technological feature that triggers a tax event and tax liability is not something users would expect when using crypto assets.”
The tax is based on an individual’s marginal rate, but the individual is eligible for a 50% rebate if they hold an asset for 12 months.
The Australian Board of Taxation is expected to deliver its review of the tax treatment of digital assets, including comments on capital gains tax, to the government on February 29, 2024.
Read more: Australia proposes new licensing regime for crypto exchanges, aims for draft legislation by 2024
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