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The Australian Taxation Office (ATO) has clarified that its capital gains tax on crypto products will also extend to wrapped tokens or token interactions with decentralized lending protocols.
The clarification highlights the intention of the Australian Taxation Office to continue taxing Australian crypto investors on capital gains when wrapping and unwrapping tokens.
Major Setback To Australian Crypto Holders
The clarification about the capital gains tax on wrapped crypto assets comes as a major setback to crypto holders in Australia. In May 2022, the Australian Taxation Office outlined crypto capital gains as one of four key focus areas. At the time, the ATO had also mentioned that nonfungible tokens (NFTs) were classified as an asset class that would be scrutinized for correct tax reporting.
Building on this very initiative, the ATO issued a clarification on a raft of taxable actions within its jurisdiction. Accordingly, the transfer of crypto assets to an address not owned by the sender or one that already holds a balance will be regarded as a taxable CGT event, according to the ATO’s statement.
“The capital proceeds for the CGT event are equal to the market value of the property you receive in return for transferring the crypto asset.”
However, the CGT event will be triggered depending on whether the individual recorded a capital gain or loss. Tax officials have considered adopting a similar approach to tax liquidity pool users, providers, and DeFi interest and rewards.
Wrapping And Unwrapping Tokens Subject To Capital Gains Tax
Additionally, wrapping and unwrapping tokens will also be subject to triggering a CGT event, according to the ATO statement.
“When you wrap or unwrap a crypto asset, you exchange one crypto asset for another, and a CGT event happens. The capital proceeds for the CGT event equal the market value of the wrapped token at the time of the exchange.”
This statement by the ATO clarifies that the wrapping and unwrapping of crypto tokens, irrespective of their price at the time of unwrapping, will be subject to capital gains tax.
Breach Of Technology Neutrality Principle?
According to Chloe White, the managing director of Genesis Block, who is also an advisor to Blockchain Australia, the move by the ATO violates the technology neutrality principle and one that impacts the financial future of young Australians.
“The Australian Tax Office is in breach of the technology neutrality principle and is creating policy in lieu of Treasury leadership. It’s time for the Government to step in and correct these errors made by the ATO, who have continued to dig their heels in despite the evidence.”
The move could have a significant impact on Australians using DeFi despite the guidance being non-binding and only representing the tax office’s interpretation of the law. This means it is not the same as a court decision or legislation. Additionally, the move has come in for stinging criticism from the crypto community, with one lawyer claiming this could even apply to transferring tokens to and from centralized exchanges. Michael Bacina, Digital Assets lawyer at Piper Alderman Lawyers, stated,
“Being able to wrap tokens is a valuable and necessary cross-chain interoperability tool. To have a purely technological function triggering a tax event and tax payable is not something users would expect when using crypto-assets.”
Australia’s Board of Taxation is now scheduled to review the tax treatment of digital assets. This will include comments on the capital gains tax on crypto. The review will be submitted to the government by the 29th of February, 2024.
Adding to the stress of crypto holders in Australia is the recent exploit of the CoinSpot exchange, leading to the loss of $2.4 million worth of crypto. The hack was the result of a possible compromise of a private key of one of its hot wallets. According to data from Etherscan, a transaction of 1,262 ETH was moved from the Coinspot wallet to the alleged hacker’s wallet.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.