Recently, the Australian Taxation Office (ATO) introduced new rules related to transactions in decentralized finance (DeFi), causing a whirlwind of uncertainty. These rules, which deal with capital gains tax (CGT), remain shrouded in ambiguity, particularly regarding net participation and transfers to tier 2 bridges.

The heart of the issue lies in the ATO’s lack of clarity on whether certain actions in DeFi, such as staking Ether on Lido or transferring funds via bridges to layer 2 networks, trigger a CGT event. This uncertainty leaves DeFi users in a tricky position, unsure of how to navigate tax rules.

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In a document released on November 9, the ATO mentions that CGT is applicable when transferring tokens to another address or smart contract that is not under the “beneficial ownership” of the user. Furthermore, situations such as exchanging one crypto asset for another or providing liquidity to a protocol can also generate CGT events.

Despite these criteria, the rules do not directly clarify whether activities such as net staking or sending tokens across layer 2 bridges are included. An ATO spokesperson, when asked, responded vaguely, indicating that the tax consequences depend on the specific actions taken on the platform or contract. This is in line with the facts and circumstances of the taxpayer.

Where do you place Australia in this scenario?

This ambiguity leaves Australia’s DeFi investors in limbo, unable to adequately comply with rules, considered by many to be aggressive and potentially problematic. For example, if a user buys ETH for $100 and stakes it or transfers it to an L2 when the price reaches $1,000, they may have to pay taxes on the $900 gain, even without selling the ETH or realizing the profit.

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Interestingly, Liberal Party Senator Andrew Bragg points out that the former government requested proposed tax rules for cryptocurrencies. The result, on the other hand, will only come to an end in February of next year. Meanwhile, the ATO has been allowed to set the rules itself, creating a situation of complexity and uncertainty for users.

Industry experts such as Danny Talwar, head of tax at Koinly, and Matt Walrath, founder of Crypto Tax Made Easy, have expressed their concerns. Talwar suggests that transfer via bridges may result in a CGT event depending on the change in beneficial ownership. Walrath, on the other hand, criticizes the ATO’s lack of understanding of DeFi, and questions the application of CGT on transactions such as net staking and transfers to layer 2 blockchains.

In summary, the tax landscape for cryptocurrencies in Australia remains in a state of uncertainty. With nebulous rules and a lack of clear answers from the ATO, DeFi users face a challenge in meeting their tax obligations.


The views and opinions expressed by the author, or anyone mentioned in this article, are for informational purposes only and do not constitute financial, investment or other advice. Investing or trading cryptocurrencies carries a risk of financial loss.


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