Australia’s tax agency won’t clarify its confusing, ‘aggressive’ crypto rules

November 24, 2023 Coin Telegraph

ATO

The Australian Tax Office’s new rules on DeFi are unclear on whether capital gains taxes apply to liquid staking and transferring to layer 2 bridges.

Australia’s tax regulator has been unable to clarify confusing aspects of its new guidance that suggests capital gains tax (CGT) is payable on a slate of everyday decentralized finance transactions.

The ATO failed to answer direct questions from Cointelegraph on whether staking Ether on Lido or transferring funds via bridges to layer 2 networks are CGT events, leaving DeFi users in the dark about how to comply.

The Nov. 9 guidance from the Australian Taxation Office (ATO) says CGT is payable when transferring tokens to another address or smart contract that a person doesn’t have “beneficial ownership” over or if the address has a non-zero balance of the tokens.

Exchanging “one crypto asset for a right to receive an equivalent number of the same crypto asset in the future,” providing liquidity to a protocol, wrapping tokens and loaning assets are ATO examples of DeFi uses incurring a CGT event.

While the criteria suggests the rules may encompass liquid staking — such as staking Ether (ETH) on Lido — or sending tokens through a layer 2 bridge, this hasn’t been clarified.

An ATO spokesperson said in response to direct questions that the tax consequences of a transaction “will depend on the steps taken on the platform or contract, and the relevant surrounding facts and circumstances of the taxpayer who owns the cryptocurrency assets.”

The non-answer leaves investors unable to comply with possibly unintended consequences of the opaque new guidance, which has not yet been tested in court.

A CGT event would mean that if a DeFi user in Australia bought ETH for $100 and then staked it or sent it via a bridge to an L2 when the price is $1,000, they would need to pay tax on $900 “profit,” even though they haven’t sold the ETH or realized a profit.

Liberal Party Senator Andrew Bragg told Cointelegraph the former government had commissioned the Board of Taxation to propose appropriate rules for taxing cryptocurrency, but the findings have been delayed twice and will now not be released until February next year.

“In absence of legislation, the ATO has been allowed to make up the rules on their own,” Senator Bragg said.

He said the Labor government’s “laziness in not releasing these findings” has created complexity and uncertainty for Australian crypto users.

Koinly head of tax Danny Talwar said that in his opinion, a transfer via a bridge may result in a CGT event, but it largely hangs on whether a change in beneficial ownership occurred.

He added liquid staking would be a CGT event as the ATO views it as a crypto-to-crypto transaction, where Ether is swapped for another token.

Matt Walrath, the founder of Crypto Tax Made Easy, thinks the ATO doesn’t fully understand DeFi and called the new rules “aggressive.” He added they make staking and transferring funds to layer 2 blockchains much tougher for Australian DeFi users.

“Things are moving so fast within DeFi, I think they don’t have enough of an understanding about the nature of [what] these transactions actually are.”

Walrath contested beneficial ownership is transferred when users interact with liquid staking services, meaning no CGT event occurs. He said stakers can still withdraw funds at any time and the staked tokens technically don’t leave the user’s wallet.

“Although the bank might own my house when I mortgage it, I’m still the beneficial owner. I can rent that house out and derive the income from it. I’m the one who can enjoy it by living,” he sa.

The way the ATO rules on wrapped tokens read, it also looks like bridging ETH to a L2 is a CGT event.

In fact, the way most bridges work...every cross-chain bridge could be considered a CGT event.

You think you're HODLing and transferring. The ATO thinks you're disposing and…
— Crypto Tax Made Easy (@CryptoTaxSucks) November 17, 2023

Talwar suggested the new rules on wrapped tokens lack “economic substance.”

“Wrapped Bitcoin is economically similar to Bitcoin and therefore there is a question as to whether a CGT event has occurred.”

“We need more people in the Aus crypto community fighting for sensible tax laws,” Walrath stressed.

Magazine: Best and worst countries for crypto taxes – plus crypto tax tips

Additional reporting by Jesse Coghlan.

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Crypto capital gains one of four key areas for Australian Tax Office

May 16, 2022 Coin Telegraph

ATO

“Remember, you can’t offset your crypto losses against your salary and wages,” said ATO assistant commissioner Tim Loh.

The Australian Taxation Office (ATO) has outlined crypto capital gains as one of four key areas of focus in 2022.

A capital gain or loss refers to the price difference between the time an asset was purchased and the time it was sold. The percentage owed to the ATO varies between income brackets and duration of ownership, but in general, the rate is reduced for assets held longer than 12 months.

The ATO, which has fired off many warnings to crypto investors over the past few years, has also directly mentioned nonfungbile tokens (NFTs) as an asset class it will be scrutinizing for correct tax reporting.

According to a May 16 announcement, alongside capital gains from crypto, property, and shares, the ATO will also look at record-keeping, work-related expenses, and rental property income/deductions.

With the prices of most crypto assets suffering from major losses in 2022, the ATO noted that any sold crypto asset, including NFTs needs to have a calculated capital gain or loss recorded with it, and will be “taking firm action” to deal with taxpayers who try to falsify their records

ATO assistant commissioner Tim Loh also suggested that the taxation body already has a fair idea of people’s investment activity, but urged everyone to keep diligent records to avoid any penalties, stating:

“While we receive and match a lot of information on rental income, foreign-sourced income, and capital gains events involving shares, crypto assets, or property, we don’t pre-fill all of that information for you.”

Loh also went on to note that the ATO has seen a significant rise in local crypto investors who may not be aware of the correct reporting methods:

“Crypto is a popular type of asset and we expect to see more capital gains or capital losses reported in tax returns this year. Remember you can’t offset your crypto losses against your salary and wages.”

“Through our data collection processes, we know that many Aussies are buying, selling, or exchanging digital coins and assets so it’s important people understand what this means for their tax obligations,” he added.

Australian Tax Office says it can’t rely on crypto users’ own records

November 26, 2021 Coin Telegraph

ATO

“Our main concern is that many taxpayers believe their cryptocurrency gains are tax-free or only taxable when the holdings are cashed back into Australian dollars,” said the ATO commissioner.

The Australian Tax Office (ATO) says it can’t rely on crypto investors to keep track of their crypto transactions and profits — even though most investors try their best.

Speaking at the 14th International ATAX Conference on Tax Administration conference on Nov. 23, ATO commissioner Chris Jordan stressed that many new crypto investors may not entirely understand their tax reporting obligations:

“In a sector that is growing rapidly with new investors, we can’t rely on taxpayers knowing they need to keep records of their investment income and capital gains and disclose it on their tax returns.”

“Our main concern is that many taxpayers believe their cryptocurrency gains are tax-free or only taxable when the holdings are cashed back into Australian dollars,” he added.

Jordan explained that the ATO has been working on ways to “nudge” people in the right direction such as pre-filling data on tax returns to prompt crypto users to report their investments.

The commissioner also said the ATO has ramped up its trading data matching capabilities in 2021 by sourcing information from cryptocurrency demand-side platforms (DSPs), share registries and brokers.

“We’ve expanded our data matching protocols to get more data from third parties to assist with emerging investments like cryptocurrency.”

He added that, “We are working hard to improve the way we collect, manage, share, and use data, but we are just scratching the surface.”

Jordan did note however that “most people do the right thing” as tax reporting compliance, or the “tax performance” of individuals and small businesses in Australia is high with “little or no intervention” from the ATO at 94% and 87% respectively.

Chainalysis down under

A firm that the ATO may call on in future is the Commonwealth Bank of Australia’s partner Chainalysis.

On Nov. 24, Chainalysis’ country manager in Australia and New Zealand Todd Lenfield told the Australian Financial Review that his firm is hoping to provide key expertise to AUSTRAC and the ATO.

“We want to have conversations with AUSTRAC about what they are looking to regulate and explain to the tax office the lessons that can be learned from what the IRS is doing. We can take experience we have got in the space, and provide a local flavor,” he said.

The firm currently provides blockchain analysis services for the U.S. Federal Bureau of Investigation and Internal Revenue Service, it also investigated Russia-based crypto business Suex OTC which was targeted by the U.S. Treasury Department in September over facilitating transactions for ransomware payments.

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ATO

Chainalysis down under

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