The Australian Taxation Office (ATO) has declared that individuals engaging in the process of wrapping or unwrapping cryptocurrency tokens will be subjected to capital gains tax (CGT). This taxation applies irrespective of the tokens’ market value at the time of the wrapping or unwrapping activities. In essence, any capital gains or losses resulting from these transactions will now be subject to taxation by the ATO.
The Australian Taxation Office (ATO) is the principal revenue collection agency of the Australian Government. It is responsible for managing and shaping the tax, excise, and superannuation systems that fund public services and infrastructure in Australia.
It collects income tax, goods and services tax (GST), and other federal taxes, and it also manages the Australian Business Register, delivers the Higher Education Loan Program, administers key components of Australia’s superannuation system, and delivers many Australian government payments.
The ATO plays a crucial role in ensuring compliance with tax laws, providing guidance to taxpayers, and facilitating the efficient administration of the tax and superannuation systems in Australia. The ATO also offers digital services, such as the ATO app, which allows individuals to manage their tax and super affairs on the go.
A wrapped crypto asset is a tokenized version of a cryptocurrency or digital asset that is pegged to the underlying asset on a 1:1 ratio. It is designed to enhance interoperability in decentralized finance (DeFi).
Wrapped crypto assets are especially beneficial for cross-chain interoperability and DeFi applications, as they enable users to take advantage of the various features and services provided on several blockchains by allowing assets from one blockchain to be used easily on another
ATO and crypto taxation
It can be recalled that the organization recently issued guidance concerning the capital gains tax (CGT) treatment of activities related to decentralized finance (DeFi) and the wrapping of crypto tokens by individuals.
This guidance reinforces and strengthens the ATO’s position, revealing its commitment to taxing Australians on capital gains arising from these specific transactions.
Starting in May 2022, the Australian Taxation Office (ATO) has designated crypto capital gains as a significant area of focus. To elaborate on this initiative, the tax authority has provided clarification on several actions subject to taxation within its jurisdiction.
Specifically, the ATO considers the transfer of crypto assets to an address not controlled by the sender or to an address with an existing balance as a taxable Capital Gains Tax (CGT) event. This implies that such transactions will be subject to capital gains tax obligations according to the ATO’s regulations.
However, it added that the occurrence of the CGT event depends on whether the individual records a capital gain or loss. Similar considerations apply to taxing liquidity pool users, providers, and participants in decentralized finance, including interest and rewards.
Additionally, the act of wrapping and unwrapping tokens will now trigger a CGT event, as clarified by the ATO: “When you wrap or unwrap a crypto asset, you exchange one crypto asset for another and a CGT event happens.” This implies that capital gains tax will apply to these actions, regardless of the tokens’ market price at the time.
This is no surprise as various nations are taking steps to provide guidelines that control how crypto operates in their jurisdictions. For example, Europe has created MiCA which is designed to regulate the digital asset economy in the region including crypto assets.
