Confusing Tax Rules Leave DeFi Users in the Dark in Australia
Australia’s tax regulator has been unable to clarify the new guidance that suggests capital gains tax (CGT) is payable on a range of decentralized finance (DeFi) transactions. Despite direct questions, the Australian Taxation Office (ATO) has failed to provide clarity on whether staking Ether (ETH) on Lido or transferring funds through bridges to layer 2 networks are CGT events, leaving DeFi users in the dark about how to comply.
Tax Consequences Depend on the Facts and Circumstances
The Nov. 9 guidance from the ATO states that CGT is payable when transferring tokens to another address or smart contract for which the user does not have “beneficial ownership,” or if the address has a non-zero balance of the tokens. Examples given by the ATO that would incur a CGT event include exchanging crypto assets for a right to receive an equivalent number of the same crypto asset in the future, providing liquidity to a protocol, wrapping tokens, and loaning assets. An ATO spokesperson said that the tax consequences of a transaction “will depend on the steps taken on the platform or contract, and the relevant surrounding facts and circumstances of the taxpayer who owns the cryptocurrency assets.”
Investors Left Unable to Comply
The lack of clarity has left investors unable to comply with possibly unintended consequences of the opaque new guidance, which has not yet been tested in court. For example, if an Australian DeFi user bought ETH for $100 and then staked it or sent it via a bridge to an L2 when the price is $1,000, they would need to pay tax on $900 “profit,” even though they haven’t sold the ETH or realized a profit.
Delayed Board of Taxation Findings
Liberal Party Senator Andrew Bragg told Cointelegraph that the former government had commissioned the Board of Taxation to propose appropriate rules for taxing cryptocurrency, but the findings have been delayed twice and will now not be released until February next year. In their absence, the ATO has been allowed to make up the rules on their own. Senator Bragg said this has created complexity and uncertainty for Australian crypto users.
Experts’ Opinion on CGT Events
According to Koinly head of tax Danny Talwar, a transfer via a bridge may result in a CGT event, depending on whether a change in beneficial ownership occurred. Talwar also believes that liquid staking is a CGT event as the ATO views it as a crypto-to-crypto transaction, where Ether is swapped for another token.
ATO’s Lack of Understanding
Matt Walrath, the founder of Crypto Tax Made Easy, thinks the ATO doesn’t fully understand DeFi and called the new rules “aggressive.” He added they make staking and transferring funds to layer 2 blockchains much tougher for Australian DeFi users. Walrath contested beneficial ownership is transferred when users interact with liquid staking services, meaning no CGT event occurs.
Conclusion
The ATO’s lack of clarity on their new guidance leaves DeFi users in the dark about how to comply with potentially unintended consequences. The Board of Taxation’s findings have been delayed until February 2021, leaving the ATO to make up the rules in the meantime. Experts believe that a transfer via a bridge may result in a CGT event, and liquid staking is a CGT event, but opinions differ on whether beneficial ownership is transferred when users interact with liquid staking services.
