The Australian Taxation Office (ATO) published new guidance on November 9, stating that capital gains tax (CGT) applies to certain decentralized finance (DeFi) transactions. However, the tax agency has failed to clarify key aspects of these rules, leaving Australian cryptocurrency investors confused about how to comply with them.
There are no direct answers to daily DeFi taxes
CGT is paid when tokens are transferred to smart contracts or addresses not owned by the user, the guide said. This includes activities such as staking, lending, and token wrapping.
The ATO has not confirmed whether day-to-day DeFi activities, such as storing liquid ether via Lido or transferring funds via Layer 2 bridges, incur CGT, despite direct questions from industry members.
If CGT applies to such transactions, it would mean that investors would owe tax on the “profits” even if they did not sell their cryptocurrencies or make any actual profits. For example, an Australian who bought Ethereum for $100 and then closed the gap when the price was $1,000 will have to pay taxes on $900 of the “profit” even though he still owns Ethereum.
The ATO simply stated that the tax consequences depend on “steps taken on the platform” and the specific circumstances of users, leaving DeFi users unsure of how to comply with the unclear new rules.
Experts criticize the aggressive approach to taxing decentralized finance
Industry leaders argue that this aggressive approach shows the tax agency’s lack of understanding of the nuances of DeFi protocols.
“I think they don’t understand enough what these transactions really are,” said Matt Walrath, founder of Crypto Tax Made Easy.
Walrath explained that staking and lending does not transfer beneficial ownership, as users can still withdraw their assets at any time.
“Even though the bank can own my house when it mortgages it, I am still the beneficial owner,” he added.
The previous Australian government commissioned the Board of Revenue to establish appropriate tax rules for cryptocurrencies. But those recommendations, which have already been postponed twice, are not expected until February 2023.
“In the absence of legislation, the ATO has been allowed to make the rules itself,” said Senator Andrew Bragg, who criticized the government’s inaction in an interview with Cointelegraph.
He said the lack of clear legislation had created “complexity and uncertainty” for Australian cryptocurrency users.
DeFi users argue that everyday activities, such as using liquid storage or bridging, are necessary to reap the technological benefits of cryptocurrency networks. Imposing taxes on them discourages the adoption of this technology. They want to develop sensible tax policy in consultation with industry experts, not blanket rules created in a vacuum.
Experts agree that clarity is urgently needed, even if it means paying taxes. They hope to soon see precise legislation, developed in collaboration with industry. But until then, Australian DeFi users have no choice but to wait or take the matter to court themselves.