Australia’s ATO Leaves DeFi Investors Puzzled with New CGT Guidelines

Recent guidance from the Australian Taxation Office (ATO) on applying capital gains tax (CGT) to certain decentralized finance (DeFi) transactions has sparked confusion among Australian crypto investors. Released on November 9, the new rules lack clarity on crucial aspects, leading to uncertainty about compliance.

Unclear Tax Implications for Common DeFi Activities

The ATO’s guidance indicates that CGT is applicable when transferring tokens to smart contracts or addresses not owned by the user, covering activities like staking, lending, and wrapping tokens. However, it remains unclear whether standard DeFi actions, such as liquid staking Ether through Lido or using layer-2 bridges, are subject to CGT.

If CGT applies to these transactions, investors might face tax obligations on “profits” even without selling their crypto or realizing any tangible gains. For instance, an investor purchasing Ether at $100 and transferring it via a bridge when its value reaches $1000 could owe tax on $900 of “profit,” despite retaining ownership of the ETH.

The ATO’s response to inquiries about these transactions has been vague, stating tax consequences depend on individual circumstances and platform-specific steps, leaving DeFi users in limbo.

Industry Professionals Challenge ATO’s Tax Approach

Crypto industry experts criticize the ATO’s approach, suggesting a misunderstanding of DeFi protocol dynamics. Matt Walrath, founder of Crypto Tax Made Easy, points out that activities like staking and lending do not transfer beneficial ownership, as users retain the ability to withdraw their assets at any time.

Walrath drew an analogy with traditional banking, where even though a bank might hold a mortgage, the homeowner remains the beneficial owner.

The ATO’s initiative comes in the absence of tailored crypto tax legislation, which the former Australian government had tasked the Board of Taxation to develop. However, the Board’s recommendations have been delayed and are not expected until February 2023.

Senator Andrew Bragg criticized the government’s lack of action, arguing that the absence of clear legislation has led to “complexity and uncertainty” for crypto users in Australia.

DeFi enthusiasts argue that taxing basic activities like liquid staking or using bridges impedes the adoption of beneficial crypto technologies. They advocate for sensible tax policy formulated with input from industry specialists, rather than broad, ill-defined rules.

As the crypto community awaits more nuanced legislation, Australian DeFi users are left with limited options: either navigate the current ambiguity or potentially challenge the ATO’s stance in court.