There is a wide variety of what constitutes staking in the crypto market, but the ATO has provided the following high-level definition:
Staking involves locking your existing crypto asset tokens to validate transactions on the blockchain and create new blocks. The users who create new blocks in this system are known as forgers.
The ATO views ‘forgers’ who create new blocks should treat the tokens they receive as ordinary income and to declare that on their tax return.
The guidance also looks at the proof-of-stake consensus mechanism – where forgers hold units of a crypto asset to validate transactions to create new blocks. Upon the verification of a transaction on the network as valid, there is a consensus.
The ATO then takes the opportunity to look at other consensus mechanisms that reward existing token holders for their role in maintaining the network and which also have the same tax outcome. Rewards received through: i) proof of authority and proof of credit mechanisms by validators; ii) agent nodes and guardian nodes; and iii) premium stakers and other entities performing comparable roles, will also be treated as reportable ordinary income.
A forger or miner will also receive ordinary income equal to the monetary value of the tokens they receive as a reward for participating in proxy-staking or voting with their tokens in a consensus mechanism. The key is that the staker has received something with a known market value.
Importantly, when a token holder disposes of a crypto asset earned through any of the above staking processes, they will also need to work out whether they have made a capital gain or loss for the purposes of CGT.
In relation to ‘airdrops’ – a tool used to distribute crypto assets to a group of people (whether they want it or not) to try and increase the adoption of a token, the ATO has now said the monetary value of an established token received in an airdrop is also reportable ordinary income at the time of receipt.
Thankfully, where a crypto project has made an initial airdrop of tokens that is the very first distribution of its tokens, and where there has been no trading in the project’s tokens prior to the airdrop, that is there is no market value, the ATO will consider that the token holder does not derive ordinary income or make a capital gain at the time of receipt, but if the tokens are free (which is usually the case under an airdrop), they have a cost base of zero and the whole of any subsequent sale or swap for any amount above zero will trigger a CGT event, but the tokens will be eligible for a normal 50% CGT discount if the assets are held for longer than 12 months.
This guidance follows the repeated requests from the industry for clearer guidance from regulators in the absence of legislative reform. In June this year, federal Treasurer Jim Chalmers issued a statement confirming that the Labor government planned to introduce legislation clarifying the tax treatment of digital currencies.
Last week, Treasury released an exposure draft of the legislation which seeks to clarify that digital currencies will not be taxed as foreign currency under Australian law, in line with the Administrative Appeals Tribunal’s decision in Seribu v Federal Commissioner of Taxation. That submission process continues and with the Board of Taxation continuing their review, we expect to see more clarification of the Australian tax position regarding crypto in coming months.
Michael Bacina – Partner, Piper Alderman