In an updated guidance, Australia’s tax authority clarified that it believes wrapped tokens or token interaction with decentralised (DeFi) lending protocols fall under the purview of its capital gains tax on crypto products.
Investors in cryptocurrencies were alerted by the Australian Taxation Office (ATO) last year that capital gains and losses on sales of digital assets, such as non-fungible tokens (NFT), need to be reported. Wrapped tokens, numerous “DeFi “lending” and “borrowing arrangements,” and generally any time you move a cryptocurrency asset to an address you don’t control are all included in the most recent update.
“When you wrap or unwrap a crypto asset, you exchange one crypto asset for another and a CGT (Capital Gains Tax) event happens, the update said. “The capital proceeds for the CGT event equal the market value of the wrapped token at the time of the exchange.”
As per the guidelines, this encompasses liquidity pools and providers wherein a CGT event occurs upon the deposit or withdrawal of cryptocurrency assets from the liquidity pool. If a DeFi platform pays you incentives in the form of cryptocurrency assets, that too will be a CGT event.
Although the move is a non-binding tax office guidance representing that tax office’s interpretation of the law—that is, it is not the same as a court decision or legislation—it could have a chilling effect on Australians using DeFi. The country’s cryptocurrency industry has also criticised it, with one attorney arguing that this might also apply to the transfer of tokens to centralised exchanges.
“Being able to wrap tokens is a valuable and necessary cross-chain interoperability tool,” said Michael Bacina, Digital Assets lawyer at Piper Alderman Lawyers. “To have a purely technological function triggering a tax event and tax payable is not something users would expect when using crypto-assets.”
Although the tax is determined by an individual’s marginal rate, those who own assets for a full year are eligible for a 50% discount. By February 29, 2024, Australia’s Board of Taxation is expected to provide the government with a review of the tax treatment of digital assets, including capital gains tax commentary.