ATO Set to Enforce Capital Gains Tax on Wrapped Cryptocurrency Tokens

The Australian Taxation Office (ATO) has announced that people involved in wrapping or unwrapping cryptocurrency tokens will face capital gains tax (CGT). This tax will be imposed regardless of the tokens’ market value during the wrapping or unwrapping. Essentially, any gains or losses arising from these transactions will now be subject to taxation by the ATO.

A tokenised representation of a cryptocurrency or digital asset, a wrapped crypto asset maintains a 1:1 peg to the underlying asset. Its purpose lies in bolstering interoperability within decentralised finance (DeFi).

These assets prove notably advantageous in cross-chain interoperability and DeFi applications. They empower users to leverage diverse features and services across multiple blockchains, facilitating seamless utilisation of assets from one blockchain on another.

In May 2022, the ATO highlighted crypto capital gains among four primary areas of emphasis. Expanding on this initiative, the Australian tax authority has recently specified various actions subject to taxation within its jurisdiction. According to the ATO’s statement, transferring crypto assets to an address not under the sender’s control or with an existing balance will be treated as a taxable CGT event:

However, it noted that the CGT event’s existence relies on whether the individual registers a capital gain or loss. Comparable factors are taken into account when taxing users, providers, and participants of liquidity pools in decentralised finance, encompassing interest and rewards.

Moreover, the action of wrapping or unwrapping tokens will now initiate a CGT event, as clarified by the ATO:

“When you wrap or unwrap a crypto asset, you exchange one crypto asset for another and a CGT event happens.”

This signifies that irrespective of the tokens’ market value at the moment, capital gains tax will be enforced on these transactions.

This comes as no shock, given that many countries are implementing frameworks to regulate the operations of cryptocurrencies within their borders.

Australia’s Board of Taxation has slated a review of the taxation approach toward digital assets, encompassing insights on cryptocurrency capital gains tax. The findings from this review are set to be presented to the government by February 29, 2024.