Australia’s tax authority, the Australian Taxation Office (ATO), has created confusion with its recent guidance on decentralized finance (DeFi) transactions and capital gains tax (CGT). The ATO, when questioned, failed to provide clarity on whether activities like staking Ether on Lido or transferring funds via bridges to layer 2 networks trigger CGT events, leaving DeFi users uncertain about compliance.
According to the ATO’s November 9 guidance, CGT is applicable when transferring tokens to an address or smart contract without “beneficial ownership” or if the address holds a non-zero balance of the tokens. Examples of DeFi activities incurring CGT events include exchanging crypto assets for future rights, providing liquidity to a protocol, wrapping tokens, and loaning assets.
Despite indications that these rules might cover activities like liquid staking or token transfers through layer 2 bridges, the ATO’s response to direct questions was vague. The spokesperson stated that tax consequences depend on the platform or contract steps taken and the specific circumstances of the taxpayer.
This lack of a clear response has left investors unable to navigate the potential unintended consequences of the new guidance, which has not been tested in court. In practical terms, a CGT event could mean that a DeFi user in Australia might owe taxes on the perceived “profit” of an asset even if it hasn’t been sold or the profit realized.
Liberal Party Senator Andrew Bragg criticized the ATO for formulating rules independently due to the delay in the government-recommended rules from the Board of Taxation. He noted that the delay has created complexity and uncertainty for Australian crypto users.
Experts in the field, such as Koinly’s head of tax Danny Talwar, suggest that transfers via bridges may trigger CGT events, depending on changes in beneficial ownership. Talwar also argued that liquid staking could be considered a CGT event, as the ATO sees it as a crypto-to-crypto transaction.
Matt Walrath, founder of Crypto Tax Made Easy, expressed concerns about the ATO’s understanding of DeFi, labeling the new rules as “aggressive.” He argued that these rules make activities like staking and transferring funds to layer 2 blockchains more challenging for Australian DeFi users. Walrath contended that the ATO’s view on beneficial ownership transfer during interactions with liquid staking services might not be accurate, emphasizing that stalkers retain control over their funds.
Moreover, concerns have been raised about the economic substance of the ATO’s rules on wrapped tokens, with experts suggesting that they may lack economic justification. There is a growing call within the Australian crypto community for more sensible tax laws and a better understanding of the rapidly evolving DeFi landscape.