Australia’s tax agency won’t explain its confusing, ‘confusing’ crypto rules.

Australia's tax watchdog has failed to clear up confusing aspects of new rules for capital gains tax (CGT) levied on day-to-day decentralized financial transactions.

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

November 9 guidance from the Australian Taxation Office (ATO) states that CGT is payable when transferring tokens to another address or smart contract where a person does not have “beneficial ownership” of the tokens or if the address has a non-zero balance.

“Exchanging one crypto asset for the right to receive the same crypto asset in the future” is a Diffie CGT event for protocol funding, token stacking and lending.

While the specifications suggest that the rules could include staking liquidity — such as staking Ether (ETH) on Lido — or sending tokens through a Layer 2 bridge, this was not specified.

In response to direct questions, an ATO spokesperson said the tax consequences of the transaction “will depend on the actions taken on the platform or contract and the taxpayer status of the owner of the cryptocurrency assets concerned.”

The answer is that it allows investors to respect the potential unintended consequences of the vague new guidance, which has yet to be tested in court.

The CGT event means that if a Defi user in Australia buys ETH for $100 and then deposits or sends it to L2 via a bridge, the value is $1,000, even though they have to pay tax on the $900 “gain”. You did not sell the ETH or make a profit.

Liberal Party Senator Andrew Bragg told Cointelegraph that the previous government ordered the Tax Board to come up with the appropriate rules for cryptocurrency recording, but the findings have been delayed twice and now won't be released until February next year.

“In the absence of legislation, the ATO is allowed to make the rules themselves,” Senator Bragg said.

The Labor government says its “laziness in not releasing these findings” has created confusion and uncertainty for Australian crypto users.

Coinley's head of tax, Danny Talwar, said a transfer through a bridge could trigger a CGT event, but it was mostly due to a significant change in ownership.

He added that the liquidation amount would be a CGT event, as the ATO treats it as a crypto-to-crypto transaction where Ether is converted into another token.

Related: 99.5% of Crypto Investors Will Not Pay Taxes by 2022, Study Says

Matt Walrath, founder of Crypto Tax Made Easy, thinks the ATO doesn't fully understand DeFi and calls the new rules “brutal”. He added that transferring funds to and from Layer 2 would make it very difficult for Australian DeFi users.

Things are moving so fast in DeFi, I think they don't have enough understanding of nature [what] These transactions are in fact.

Walrath argued that beneficial ownership is transferred when users engage with liquidity structuring services, meaning no CGT event occurs. Stakeholders can still withdraw money at any time, he said, and held tokens technically never leave the user's wallet.

Although the bank may own my house when I foreclose, I am still the beneficiary. I can rent that house and earn the income. I am the one who enjoys living,” he said.

The way ATO rules on bundled tokens, linking ETH to L2 also appears to be a CGT event.

In fact, the way most bridges work…each cross-chain bridge can be considered a CGT event.

They think they are HODLing and transferring. The ATO thinks you are avoiding it and…

— Crypto Taxes Made Easy (@CryptoTaxSucks) November 17, 2023

Talwar pointed out that the new rules on capped tokens lack “economic substance”.

“A bundled Bitcoin is economically similar to Bitcoin and therefore there is a question of whether a CGT event has occurred.

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

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Additional reporting by Jesse Coghlan.