ATO determining whether DeFi investments trigger capital gains tax

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November 03 2021
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Australia’s taxman is considering clearing the air when it comes to the capital gains implications of Celsius and other DeFi platforms.

The Australian Tax Office (ATO) is turning its gaze towards the world of decentralised finance (DeFi).

In a statement to nestegg, the ATO confirmed that it had been taking a closer look at crypto-based finance platforms like Celsius and how they fit into the current tax framework.

“The ATO is looking at various decentralised finance platforms and is working on developing public ATO views to assist investors in understanding the tax implications of their activities,” a spokesperson for the Tax Office said.

Ultimately, the ATO told nestegg that the tax implications of these crypto platforms and DeFi protocols would be determined by their structure.

“For instance, the terms and conditions that govern taxpayers’ interactions with the Celsius platform state that Celsius own and hold the assets that are transferred onto their platform. This means that there would be a disposal of the asset when the asset is transferred,” the ATO said.

Whether or not a “disposal” of an asset has occurred is significant because this determines whether or not a capital gains tax event occurs as a result under the current tax rules of the ATO around cryptocurrencies.

Launched back in 2017, Celsius is one of many CeFi and DeFi platforms that have cropped up in recent years. Built around the native CEL token, it aims to put a crypto-based spin on traditional banking products like savings accounts and asset-backed loans.

Built on the same blockchain technologies powering the Bitcoin and Ethereum networks, DeFi has become one of the most talked about corners of the crypto conversation with an estimated market cap of $300 billion.

“While developers have been building them for years behind the scenes, the adoption of DeFi protocols like Uniswap and Aave exploded over the past 18 months,” Cointree CEO Shane Stevenson told nestegg.

Mr Stevenson said that while much of the crypto conversation is focused on stablecoins and layer-1 blockchains like Ethereum, Cardano and Solana, DeFi is helping realise the original vision and purpose of crypto.

“These blockchains were built for a reason, and DeFi is helping make their vision a reality,” he said.

Speaking to nestegg, CryptoTax CEO Shane Brunette revealed that his company has recently been in discussions with the ATO around the tax issues presented by the liquidity pools and automated market-makers found in the world of decentralised finance.

“It’s a lot of questions around some of the more complex transactions that exist, and at what point is there a disposal versus a deposit into a smart contract,” he explained.

When investors deposit crypto into a liquidity pool, they typically receive a token or certificate in return.

While Mr Brunette said that most investors see this as a kind of deposit receipt, he suggested that the ATO may feel differently.

“The way that the ATO has been discussing this so far in our conversations has been that this is perhaps a disposal, and that you’re actually disposing of the asset with the right to buy it back at a later date with interest,” he said.

Mr Brunette added that this interpretation “would be surprising for most participants of the market at the moment”.

In its statement to nestegg, the ATO acknowledged that other DeFi platforms might not operate in the same way as Celsius does.

“No CGT event will arise where it can be shown that the exact same asset is continuously owned by a taxpayer throughout the process of interacting with the platforms,” the ATO said.

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

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