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DeFi Users Seek Clarity as Australia’s Tax Office Fails to Explain New Capital Gains Tax Rules

As of November 9, the Australian Taxation Office (ATO) has issued new guidance, asserting that capital gains tax (CGT) is applicable to specific transactions within decentralized finance (DeFi). Despite this, the tax agency has not provided clear clarification on crucial aspects of these rules, leading to confusion among Australian crypto investors regarding compliance procedures.

No Straight Answers on Everyday DeFi Taxation

According to the released guidance, the Australian Taxation Office (ATO) specified that capital gains tax (CGT) is applicable when transferring tokens to smart contracts or addresses not owned by the user. This encompasses activities such as staking, lending, and wrapping tokens.

However, the ATO did not provide confirmation on whether routine DeFi activities, such as liquid staking Ether through Lido or transferring funds via layer-2 bridges, incur CGT. Despite direct inquiries from industry members, clarity on these common DeFi practices was not provided.

If CGT applies to these transactions, it would imply that investors owe tax on perceived “profits” even if they haven’t sold their crypto or realized any actual gains. For instance, an Australian who bought Ether for $100 and later sent it via a bridge when the price was $1000 would owe tax on $900 of “profit,” despite still owning the ETH.

The ATO’s response was that tax consequences depend on the “steps taken on the platform” and users’ specific circumstances, leaving DeFi users uncertain about how to comply with the ambiguous new rules.

Experts Critique Aggressive Approach to Taxing DeFi

Industry leaders argue that the Australian Taxation Office’s (ATO) aggressive approach reflects a lack of understanding of the intricacies of DeFi protocols.

Matt Walrath, founder of Crypto Tax Made Easy, stated, “I think they don’t have enough of an understanding about the nature of what these transactions actually are.” He clarified that activities like staking and lending do not transfer beneficial ownership since users can still withdraw their assets at any time.

Using the analogy of mortgaging a house, he explained, “Although the bank might own my house when I mortgage it, I’m still the beneficial owner.”

It’s worth noting that the former Australian government had assigned the Board of Taxation the responsibility of developing appropriate crypto tax rules. However, these recommendations, which have already been delayed twice, are not expected until February 2023.

Senator Andrew Bragg criticized the government’s inaction in addressing cryptocurrency tax rules, stating, “In the absence of legislation, the ATO has been allowed to make up the rules on their own.” He highlighted that this lack of clear legislation has led to “complexity and uncertainty” for Australian crypto users.

DeFi users argue that everyday activities like liquid staking or using bridges are crucial for leveraging the technological benefits of crypto networks. Taxing these activities is seen as discouraging the adoption of this technology. Users are calling for the development of sensible tax policies through consultation with industry experts, rather than the creation of blanket rules in isolation.

Experts emphasize the urgent need for clarity, even if it means paying taxes. They hope to see nuanced legislation soon, developed in collaboration with the industry. However, until then, Australian DeFi users are left with the option of waiting or potentially taking legal action themselves.

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Cryptocurrency is essentially virtual money that operates in a decentralized manner, not through a bank but directly on multiple independent computers.

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