DeFi taxation: A look at the ATO's latest updates

Overview

If you’re trading in Australia, you might have missed that the Australian Taxation Office (ATO) refreshed its guidance on decentralised finance (DeFi) in November 2023. Crypto Tax Calculator have put together a quick and easy guide to help you make sense of these updates and how they might impact your tax situation.

Here are some key takeaways from the latest updates:

Lending and borrowing

Lending and borrowing crypto assets is now considered a CGT event by the ATO due to changes in beneficial ownership.

Example:

Lisa buys 10 SOL for $1,000 ($100 each) and later ‘lends’ them to a DeFi platform when they have a value of $900.

Deposit: A CGT event occurs when Lisa ‘lends’ the coins, with Lisa realising a loss of $100. In return, Lisa receives a ‘right’ to get 10 SOL back in the future, valued at $900.

Withdrawal: The 'loan' is eventually repaid, and Lisa receives 10 SOL coins, now worth $1,200, triggering another CGT event. In this case, Lisa has a capital gain of $300 ($1,200 - $900).

The net gain from the deposit and withdrawal is $300 - $100 = $200.

This shows how a CGT event occurs when you ‘lend’ crypto, with the ‘right’ to reclaim tokens treated as a separate CGT asset, resulting in multiple gains or losses - even if you end up with the same number of coins - this reflects the complexities of DeFi lending and borrowing from a tax perspective and highlights how unexpected tax liabilities can arise.

Liquidity pools

Alongside lending and borrowing, depositing or withdrawing tokens from a liquidity pool also triggers a CGT event. However, be aware that multiple CGT events can occur within a single lending transaction.

Example:

Marty buys 1 ETH for $2000. Later, when the market value of the ETH had risen to $2200, he deposits it into a pool and receives an LP token in return.

The deposit triggers a CGT event with a $200 gain ($2200 - $2000)

Marty later withdraws his liquidity, triggering another CGT event. This time the market value of the liquidity withdrawn was $1800. As the LP token had a cost basis of $2200, this triggers a loss of $400 ($1800 - $2200).

DeFi Interest and Rewards

When you receive interest or rewards from DeFi transactions, the rewards are treated as assessable income, not capital gains. This means you should report the market value of the crypto asset reward at the time of receipt as this will be the cost base for that crypto asset if you dispose of it in future. For instance:

Example:

Chris lends stablecoins on a DeFi platform and receives a reward of 2 tokens with a market value of $100 at the time of receipt. The $100 is treated as income and taxed at Craig's marginal tax rate. This $100 becomes the cost base if Craig later sells the reward token.

Wrapped Tokens

Wrapping or unwrapping tokens triggers a CGT event due to the exchange of one crypto asset for another. If you are wrapping a token, you are effectively exchanging the original token for a wrapped version. If you are unwrapping a token, you are exchanging the wrapped token for the original version. Both wrapping and unwrapping tokens are considered CGT events.

Example:

Wrapped: Claire wraps 2 BTC (bought for $60,000) into 2 WBTC when BTC is worth $85,000. This triggers a CGT event with a $15,000 capital gain ($85,000 - $60,000).

Unwrapped: Claire decides to unwrap her WBTC back to BTC, which triggers a CGT event. The cost base of Claire’s WBTC is equal to $85,000. At the time of unwrapping, the market value of BTC is $90,000, resulting in a $5,000 capital gain.

How Crypto Tax Calculator can help

As one of the most integrated crypto tax software products on the market, Crypto Tax Calculator is designed to handle even the most complex on-chain transactions, ensuring you stay compliant with ATO regulations while minimising your tax bill.

To celebrate this collaboration, Crypto Tax Calculator is extending a special offer to BTC Markets clients. As a BTC Markets user, you can use discount code BTC30 to enjoy a 30% saving on all CTC plans. Visit Cryptotaxcalculator.io for more information.

Head over to our YouTube channel where we sat down with Patrick McGimpsey from Crypto Tax Calculator to chat about the latest guidance on Decentralised Finance (DeFi) from the Australian Taxation Office (ATO) and shed some light on its implications for Australian cryptocurrency investors.

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