Key Takeaways
- As per ATO, transferring crypto assets to an address not controlled by the sender or to an address that already holds a balance will be considered a taxable CGT event.
- ATO reinstated its commitment in taxing Australians on capital gains during the wrapping and unwrapping processes.
The Australian Taxation Office (ATO) has clarified its position on the capital gains tax (CGT) treatment of decentralized finance (DeFi) and the wrapping of crypto tokens, emphasizing its commitment to taxing Australians on capital gains during the wrapping and unwrapping processes.
In a recent statement, the ATO explained that while the wrapped token is algorithmically linked to a specific quantity of native tokens, it does not constitute the native token itself.
The ATO emphasized that the wrapping or unwrapping process doesn’t involve the “reformatting” of the native token, and it cannot be considered a single CGT asset undergoing a transformation comparable to the variation of a share’s associated rights.
Instead, the wrapped token is locked up at the bridge, and an equivalent amount of native token is issued on the other side of the bridge.
As of May 2022, the ATO identified crypto capital gains as a key focus area. Building on this initiative, the tax authority has recently provided clarification on various taxable actions within its jurisdiction.
According to the ATO, transferring crypto assets to an address not controlled by the sender or to an address that already holds a balance will be considered a taxable CGT event. The capital proceeds for this event are determined by the market value of the property received in return for the transferred crypto asset.
The taxation of liquidity pool users and providers, as well as DeFi interest and rewards, is also under consideration. Furthermore, the ATO specified that the wrapping and unwrapping of tokens will also trigger a CGT event, reinforcing its intention to continue taxing capital gains associated with these activities.
In line with increasing regulatory scrutiny, the Australian government has proposed stricter regulations for cryptocurrency trading platforms. The proposal advocates subjecting digital asset platforms to existing laws governing other financial service providers to enhance oversight of customer funds.
