ATO Refrains From Clarifying its Perplexing and “Aggressive” Cryptocurrency Rulings

The ATO has encountered difficulties in explaining ambiguous elements of its recent guidance, implying that capital gains tax (CGT) applies to various routine decentralised finance transactions.

According to CoinTelegraph, despite direct inquiries from multiple sources, the ATO did not provide clear responses regarding whether activities like staking Ether on Lido or moving funds through bridges to layer 2 networks trigger CGT events. This lack of clarification leaves DeFi users uncertain about compliance procedures.

The guidance issued on November 9 by the Australian Taxation Office (ATO) outlines that CGT obligations arise in instances where tokens are transferred to an alternate address or smart contract without “beneficial ownership” or when the address holds tokens with a non-zero balance.

The ATO’s provided examples of DeFi activities that trigger a CGT event include swapping one cryptocurrency for a promise to receive an equivalent amount in the future, contributing liquidity to a protocol, token wrapping, and lending assets.

The criteria implies that the regulations might cover liquid staking, like staking Ether (ETH) on Lido, or transferring tokens using a layer 2 bridge, yet this remains unclarified.

When directly questioned, an ATO spokesperson mentioned that the tax implications of a transaction are contingent on the actions taken on the platform or contract, as well as the specific circumstances surrounding the taxpayer who owns the cryptocurrency assets.

This lack of a clear response leaves investors without the ability to adhere to potential unintended consequences of the vague new guidelines, which have not undergone legal testing.

Under a CGT event, if an Australian DeFi user purchased ETH for $100 and later staked it or sent it via a bridge to an L2 when the price surged to $1,000, they would be liable to pay tax on the $900 “profit,” even without selling the ETH or realising an actual profit.

Liberal Party Senator Andrew Bragg informed CoinTelegraph that the previous government had tasked the Board of Taxation with proposing suitable cryptocurrency taxation rules. However, the release of these findings has been postponed twice and is now expected in February of the following year.

“In absence of legislation, the ATO has been allowed to make up the rules on their own,” Senator Bragg stated. 

He expressed that the failure of the Labor government to release these findings has led to intricacies and doubts among Australian crypto users.

According to Danny Talwar, Koinly’s head of tax, he believes that using a bridge for a transfer might trigger a CGT event, depending significantly on whether there was a shift in beneficial ownership.

Additionally, he noted that the ATO considers liquid staking a CGT event, treating it as a crypto-to-crypto transaction involving the exchange of Ether for another token.

Matt Walrath, founder of Crypto Tax Made Easy, believes that the ATO lacks a comprehensive understanding of DeFi and has labelled the new regulations as “aggressive.” He further commented that these rules create additional challenges for Australian DeFi users engaging in staking and transferring funds to layer 2 blockchains.

He expressed that the rapid developments within DeFi outpace the authorities’ grasp, indicating a lack of understanding about the true nature of these transactions.

Walrath contested the notion that beneficial ownership shifts during interactions with liquid staking services, suggesting that this absence means no CGT event should occur. He clarified that stakers retain the ability to withdraw funds at any time, emphasising that the staked tokens technically remain within the user’s wallet.

He illustrated his point by comparing it to a mortgaged house, stating, “although the bank might own my house when I mortgage it, I’m still the beneficial owner. I can rent that house out and derive the income from it. I’m the one who can enjoy it by living.”

He then pointed out that the fresh regulations concerning wrapped tokens don’t encompass “economic substance.”

He elaborated by stating, “wrapped Bitcoin is economically similar to Bitcoin and therefore there is a question as to whether a CGT event has occurred.”

Walrath emphasised the necessity for more individuals within the Australian crypto community to advocate for rational tax legislation.

Big few months coming up for regulation in Australia.