Australia's tax regulator has failed to clarify confusing aspects of its new guidance suggesting capital gains tax (CGT) is payable on a range of everyday decentralized financial transactions.
The ATO did not respond to Cointelegraph's direct questions about whether staking Ether on Lido or transferring funds over bridges to Layer 2 networks are CGT events, leaving DeFi users unsure how to comply.
The nov. 9 guide from the Australian Taxation Office (ATO) says that CGT is payable when transfer tokens to another address or smart contract on which a person has no "real benefit" or if the address has a non-zero token balance.
Exchanging “a cryptoasset for the right to receive an equivalent amount of the same cryptoasset in the future,” providing liquidity to a protocol, wrapping tokens, and lending assets are ATO examples of DeFi uses that incur a CGT event.
While the criteria suggest that the rules may cover liquid stake - how to bet Ether (ETH) on Lido, or sending tokens over a layer 2 bridge, this has not been clarified.
An ATO spokesperson said in response to direct questions that the tax consequences of a transaction "will depend on the steps taken in the platform or contract, and the relevant facts and circumstances of the taxpayer who owns the cryptocurrency assets."
The lack of response leaves investors unable to comply with the potential unintended consequences of the opaque new guidance, which has yet to be tested in court.
A CGT event would mean that if a DeFi user in Australia bought ETH for $100 and then staked it or bridged it to an L2 when the price is $1,000, they would have to pay taxes on the $900 “profit,” although I have not sold the ETH nor have I made any profits.
Liberal Party Senator Andrew Bragg told Cointelegraph that the previous government had tasked the Board of Taxation with proposing appropriate rules for taxing cryptocurrencies, but the conclusions have been delayed twice and will now not be published until February next year. .
“In the absence of legislation, the ATO has been allowed to set the rules itself,” Senator Bragg said.
He said the Labor government's “laziness in not publishing these findings” has created complexity and uncertainty for Australian cryptocurrency users.
Koinly head of tax Danny Talwar said that in his opinion a bridging transfer can result in a CGT event, but it depends largely on whether there has been a change in beneficial ownership.
He added that the liquid bet would be a CGT event, as the ATO views it as a crypto-to-crypto transaction, where Ether is exchanged for another token.
Related: Study claims that 99.5% of cryptocurrency investors did not pay taxes in 2022
Matt Walrath, founder of Crypto Tax Made Easy, believes the ATO does not fully understand DeFi and called the new rules “aggressive.” He added that they make staking and transferring funds to Layer 2 blockchains much more difficult for Australian DeFi users.
"Things are moving so fast within DeFi that I think they don't have enough understanding about the nature of [what] “These transactions really are.”
The beneficial ownership disputed by Walrath is transferred when users interact with liquid participation services, meaning that no CGT event occurs. He said that bettors can still withdraw funds at any time and that staked tokens technically do not leave the user's wallet.
“Although the bank may own my house when it mortgages it, I am still the beneficial owner. I can rent that house and earn income from it. I am the one who can enjoy it by living,” she says.
From the way the ATO rules on wrapped tokens read, it also appears that bonding ETH to L2 is a CGT event.
In fact, the way most bridges work... every interchain bridge could be considered a CGT event.
You think you are HODLing and transferring. The ATO thinks you're unraveling and...
– Crypto Tax Made Simple (@CryptoTaxSucks) November 17, 2023
Talwar suggested that the new rules on wrapped tokens lack “economic substance.”
“Wrapped Bitcoin is economically similar to Bitcoin and therefore there is a question as to whether a CGT event has occurred.”
“We need more people in the Australian crypto community fighting for sensible tax laws,” Walrath stressed.
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Additional reporting by Jesse Coghlan.
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