The Australian Taxation Office (ATO) has provided clarity on the capital gains tax (CGT) treatment of decentralized finance (DeFi) activities and the wrapping of crypto tokens for individuals.
The ATO's recent guidance reaffirms its intention to tax Australians on capital gains when wrapping and unwrapping tokens.
Wrapped tokens, like Wrapped Bitcoin (WBTC) and Wrapped ETH (WETH), are tokens used to represent cryptocurrencies and are pegged to the value of the original coin. It is used for DeFi, and can be unwrapped at any point.
In May 2022, the ATO identified crypto capital gains as one of its key focus areas. Expanding on this initiative, the tax authority has now clarified several taxable actions within its jurisdiction.
According to the ATO, transferring crypto assets to an address not controlled by the sender or to an address with an existing balance will be considered a taxable CGT event.
The ATO explained that the capital proceeds for the CGT event will be equivalent to the market value of the property received in exchange for the transferred crypto asset. However, whether a capital gain or loss is recorded will determine the triggering of the CGT event.
The ATO is also considering a similar approach for taxing liquidity pool users, providers, and DeFi interest and rewards.
Furthermore, the wrapping and unwrapping of tokens will also be subject to triggering a CGT event. The ATO clarified that when wrapping or unwrapping a crypto asset, an exchange of one crypto asset for another occurs, resulting in a CGT event, regardless of the tokens' price at the time.
The ATO's guidance provides individuals with a clearer understanding of their tax obligations regarding DeFi activities and the wrapping of crypto tokens. However, the implications of these tax regulations could hinder the development and adoption of cryptocurrencies in Australia.