Australia Introduces Capital Gains Tax For Wrapped Tokens

Now, the ATO has clarified that wrapped tokens or DeFi “lending and borrowing arrangements” are subject to the tax. — Source: Pixabay

The Australian Taxation Office has issued an update on its capital gains tax for crypto products, stating that it also extends to wrapped tokens or token interaction with decentralized lending protocols.

The previous edition of the capital gains tax stated that capital gains and losses must be reported every time a digital asset, such as a non-fungible token (NFT), is sold. Now, the ATO has clarified that wrapped tokens or DeFi “lending and borrowing arrangements” are subject to the tax too.

Essentially, any time Australians transfer crypto assets to an address they don’t control, the tax will take effect.

In its update, the Australian tax authority also clarified the other various taxable transactions within its jurisdiction. In addition to addresses users don’t control, the transfer of cryptocurrency assets to an address that already possesses a balance will now be recognized as a taxable event.

“The capital proceeds for the CGT [capital gains tax] event are equal to the market value of the property you receive in return for transferring the crypto asset,” the ATO said.

The tax implication will hinge on whether the individual reports a capital gain or loss. A similar approach is being contemplated for the taxation of liquidity pool users, providers, and participants in decentralized finance (DeFi) with respect to interest and rewards.

The act of wrapping and unwrapping tokens will also trigger the capital gains tax.

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

The ATO’s move could be significant for Australian crypto enthusiasts given its implications for DeFi users. However, the update is still considered a non-binding tax office guidance representing the ATO’s interpretation of the law, and not a binding court decision or piece of legislation.

Chloe White, managing director at investment group Genesis Block and adviser to Blockchain Australia, posted on X shortly after the update was issued, asserting that the ATO is violating the principle of technology neutrality. She added that the breach will have significant repercussions for the financial prospects of young Australians.

“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,” she said, noting that crypto is not taxed in multiple countries in Europe, Asia, the Americas, and the Middle East.