The Australian Taxation Office (ATO) and the Confusion Around DeFi Transactions
The Australian Taxation Office (ATO) recently released new guidance on the application of capital gains tax (CGT) to certain decentralized finance (DeFi) transactions. However, the lack of clarity in these rules has left Australian crypto investors puzzled about how to comply. According to the guidance, CGT is applicable when transferring tokens to smart contracts or addresses not owned by the user. This includes activities such as staking, lending, and wrapping tokens. Unfortunately, the ATO did not provide direct answers regarding whether everyday DeFi activities like liquid staking Ether through Lido or transferring funds via layer-2 bridges are subject to CGT.
If CGT does apply to these transactions, it would mean that investors would owe tax on any potential “profits,” even if they haven’t sold their crypto or realized any actual gains. For example, if an Australian individual bought Ether for $100 and later sent it via a bridge when the price was $1000, they would owe tax on the $900 gain, despite still owning the ETH.
The ATO’s vague statement that tax consequences depend on the “steps taken on the platform” and users’ specific circumstances has left DeFi users uncertain about how to comply with the new rules.
Industry Leaders’ Perspective
“I think they don’t have enough of an understanding about the nature of what these transactions actually are,” said Matt Walrath, founder of Crypto Tax Made Easy.
Walrath clarified that staking and lending don’t transfer beneficial ownership since users can still withdraw their assets at any time. “Although the bank might own my house when I mortgage it, I’m still the beneficial owner,” he added.
Industry leaders argue that this aggressive approach from the ATO showcases their lack of understanding of the nuanced nature of DeFi protocols. They stress the need for sensible tax policies developed in consultation with industry experts, rather than blanket rules created without a proper understanding of the technology.
Government Inaction and Future Expectations
The former Australian government had assigned the Board of Taxation with the task of developing appropriate crypto tax rules. However, these recommendations, which have already faced delays twice, are not expected until February 2023. This delay has allowed the ATO to establish its own rules, creating complexity and uncertainty for Australian crypto users. Senator Andrew Bragg criticized the government’s inaction in an interview with Cointelegraph, highlighting the need for clear legislation to avoid confusion in the market.
DeFi users argue that everyday activities like using liquid staking or bridges are essential for leveraging the technological benefits of crypto networks. Taxing these activities may discourage the adoption and growth of this technology. They urge the development of a sensible tax policy in collaboration with industry experts to ensure clear guidelines for all stakeholders.
Experts and industry participants emphasize the urgent need for clarity regarding taxation in the DeFi sector, even if it means having to pay taxes. They hope to see nuanced legislation developed soon, with close collaboration between relevant stakeholders. Until then, Australian DeFi users find themselves in a state of uncertainty, having to wait for further guidance or potentially seeking legal remedies.
