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The new regulations by the Australian Taxation Office regarding decentralized finance lack clarity about capital gains taxes’ application to liquid staking and transfer to layer-2 bridges.

Australia’s new tax regulator has found it difficult to shed light on the puzzling elements of its new guidance that indicates capital gains tax (CGT) is payable on a slate of daily decentralized finance (DeFi) transactions.

Australian Regulators to Adopt Tougher Regulation on Crypto

The Australian Taxation Office (ATO) did not reveal whether staking Ether on Lido or moving funds through bridges to layer-2 platforms are instances of capital gain tax. This left decentralized users unaware of how to conform.

The ATO’s November 9 guidance claimed that capital gains tax is paid by moving tokens to another address or smart contract over which an individual lacks a ‘beneficial ownership.’ Further, it is payable if the address contains a non-zero balance of the tokens.

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There are different ATO examples of decentralized finance users incurring a CGT event. They include offering liquidity to a protocol, loaning assets, wrapping tokens, and exchanging ‘a crypto for a right to acquire a similar number of the equivalent crypto asset in the future.’

The criteria show the regulations might involve liquid staking, for instance, staking Ethereum on Lido or transferring tokens via a layer-2 bridge. However, this is yet to be made clear.

According to an ATO representative, a transaction’s tax impacts ‘will rely on the steps taken on the contract or platform, and the applicable associated conditions of the taxpayer to whom the cryptocurrency assets belong.’

The non-answer results in investors’ inability to adhere to potentially inadvertent impacts of the unclear new guidance, which is yet to be tried in court.

Overview of Australia Crypto Tax

 A capital gains tax situation would mean that if a decentralized finance user in Australia purchased Ethereum for $100 and later staked it or transferred it through a bridge to an L2 when the price is $1000, they would be required to pay tax on $900 profit. This happens despite not selling the Ethereum or gaining a profit.

Andrew Bragg, a Liberal Party Senator, said the previous government had authorized the Board of Taxation to recommend suitable cryptocurrency-taxing guidelines. However, the results have been denied twice and will not be disclosed until February 2024.

Bragg said that without legislation, the Australian Taxation Office has been permitted to establish its regulations. He claimed that the Labor government’s failure to disclose the findings has resulted in doubt and created intricacy for crypto users in Australia.

Danny Talwar, Koinly’s head of tax, revealed that a transfer through a bridge might lead to a capital gains tax event. However, it mainly relies on a change in beneficial ownership.

Additionally, he said that liquid staking would be a capital gains tax event since the Australian Taxation Office considers it a crypto-to-crypto transaction that entails swapping Ether for another token.

Crypto Adoption Increases in Australia

Matt Walrath, Crypto Tax Made Easy’s founder, believes the Australian Taxation Office fails to comprehend decentralized finance fully and termed the new regulations ‘aggressive.’

He also said the rules complicate staking and the movement of funds to layer-2 blockchains. Specifically, he claimed that things are moving quite quickly within decentralized finance, and there is a lack of understanding regarding the nature of these transactions.

Walrath said beneficial ownership transfers happen when users interact with staking contracts, which include lending platforms. This means that a capital gains tax event should never take place.

He also revealed the possibility of stalkers withdrawing funds at any time, and the staked tokens do not move out of a user’s wallet. Walrath said that despite the bank owning his mortgaged house, he remains the beneficial owner.

He is capable of renting it out and getting income from it. According to Talwar, the new regulations surrounding wrapped tokens do not have ‘economic substance.’ Specifically, he said wrapped Bitcoin is equivalent to Bitcoin from an economic perspective.

As such, there is a question regarding the occurrence of a capital gains tax. Walrath stressed that more Australian crypto community members must fight for workable tax regulations.

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Michael Scott

By Michael Scott

Michael Scott is a skilled and seasoned news writer with a talent for crafting compelling stories. He is known for his attention to detail, clarity of expression, and ability to engage his readers with his writing.