The Australian Taxation Office (ATO) has released important guidance on the tax treatment of decentralized finance (DeFi) and the process of wrapping crypto tokens, as part of ongoing efforts to clarify tax obligations in the digital asset and blockchain-based finance domain.

Understanding Decentralized Finance (DeFi)

DeFi is a form of finance that leverages blockchain technology to operate without traditional financial intermediaries and is primarily conducted on the ethereum blockchain. In DeFi, capital gains can occur, and the ATO has highlighted several CGT events (A1, E2, C2, H2) that might be relevant, depending on the specific arrangement’s nature.

Trust Relationships in DeFi Arrangements

A critical factor in determining CGT events is whether a trust relationship is established within the DeFi arrangement. This becomes significant in scenarios where the legal person holds the same type of asset for other beneficiaries, impacting the sole beneficiary status.

CGT Events in DeFi Lending, Borrowing, and Liquidity Pools

The ATO’s guidance clarifies that many DeFi lending and borrowing arrangements could trigger a CGT event, primarily when beneficial ownership of a crypto asset changes. This can occur through either asset exchange or a future rights exchange. In addition, depositing into and withdrawing from liquidity pools can also constitute CGT events, determined by the market value of the assets involved.

Tax Treatment of DeFi Rewards and Wrapped Tokens

Rewards or returns from DeFi platforms are treated similarly to interest income for tax purposes. Furthermore, wrapped tokens, representing another crypto asset, are subject to CGT upon wrapping or unwrapping, based on the market value of the wrapped token at the exchange time.

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Industry Response and Concerns

Following the ATO’s clarification, there has been notable industry response. Chloe White from Genesis Block and Blockchain Australia criticized the ATO’s stance for potentially impacting the financial future of young Australians. Additionally, a local cryptocurrency exchange, CoinSpot, reportedly experienced a security issue leading to a significant financial loss, adding another layer of concern for Australian crypto users in the current regulatory landscape.

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By Team