Australia’s taxation authority has updated its guidelines on capital gains tax for cryptocurrency, explicitly stating that the tax applies to wrapped tokens and decentralised finance (DeFi) interactions. Last year, the Australian Taxation Office (ATO) emphasised the obligation for cryptocurrency investors to report gains and losses from every digital asset sale, including non-fungible tokens (NFTs). The recent clarification extends this requirement to transactions involving wrapped tokens, DeFi lending and borrowing arrangements, and any instance where a crypto asset is transferred to an address, not under the user’s control.
According to the updated guidance, when wrapping or unwrapping a crypto asset, a capital gains tax event occurs, with the capital proceeds calculated based on the market value of the wrapped token at the time of the exchange. This ruling encompasses activities in liquidity pools, such as depositing or withdrawing crypto assets and receiving rewards in the form of crypto assets from DeFi platforms.
Despite being non-binding and reflecting the tax office’s interpretation rather than a court decision or legislation, the update has raised concerns within the Australian crypto industry. Critics argue that the taxation of such transactions could extend to token transfers on centralised exchanges. Michael Bacina, a Digital Assets lawyer at Piper Alderman Lawyers, expressed reservations, highlighting the unexpected tax implications for users engaging in cross-chain interoperability through token wrapping.
The capital gains tax is determined by an individual’s marginal rate, with a 50% discount eligibility if the asset is held for at least 12 months. Australia’s Board of Taxation is set to present its review on the tax treatment of digital assets, including comments on capital gains tax, to the government by February 29, 2024. The potential impact on Australians utilising DeFi platforms has raised concerns, even though the current guidance is not legally binding.