cadena legal logo

The ATO’s New Position on Lending and Borrowing in DeFi 

The ATO's New Position on Lending and Borrowing in DeFi

Table of Contents


Decentralized Finance (DeFi) has reworked traditional financial concepts, including lending and borrowing, into peer-to-peer arrangements with no middleman. A regular taxpayer would think – the tax outcomes should be similar to traditional financial arrangements. But this is not the case.   

On 9 November 2023, the Australian Taxation Office (ATO) has provided new guidance on how these DeFi activities are treated for tax purposes, particularly concerning Capital Gains Tax (CGT)

DeFi Lending and Borrowing 

The ATO notes that DeFi uses traditional financial terms like ‘lending’, ‘borrowing’, and ‘interest’, but these don’t always align with their common meanings for tax purposes. DeFi ‘lending’ and ‘borrowing’ often result in a CGT event, primarily due to a change in the beneficial ownership of the involved crypto asset. These arrangements typically include exchanging one crypto asset for another or for a future right to an equivalent asset. Determining if and which CGT event occurs requires analysing the protocol’s terms and operation. Generally, a CGT event occurs when a fungible crypto asset is transferred to an address outside the control of the original owner. 

It is not financially viable for most crypto users to pay a tax specialist to analyse a protocol’s exact terms and operation to determine the tax treatment. It isn’t even viable for taxpayers to do it themselves, as they often use many protocols and some mislead on how they actually work.  

For example, the white paper for the now defunct Anchor Protocol did not adequately explain that yield is generated by aUST increasing in value to UST, not an actual addition of aUST every period. This has important CGT implications as value accrued as the increased price of aUST may not be taxed as income, as noted here. 

CGT Event and Capital Proceeds 

The ATO view is that each CGT event’s capital proceeds are equivalent to the market value of the property received in exchange for the crypto asset. This property could be another crypto asset or a right. Notably, the traditional rules of securities lending do not apply to these ‘lending’ transactions in the crypto asset context. 

This is based on the notion that each transaction with a smart contract triggers a CGT event if crypto tokens or coins leave your wallet. This is a very narrow reading of the CGT legislation.  

Alternative Views 

ATO web guidance is not binding on either the ATO or taxpayers. Though ignoring it can put you at risk of higher penalties if audited, despite the guidance being unofficial and lacking detailed legal reasons.  

Alternative views, which are much more practical, are still favoured by most private practitioners. For example, where you have the right to call your tokens back from a smart contract, it should not be a disposal as: 

  • CGT event E1 has not occurred, as the wallet owner maintained absolute entitlement to the crypto asset; and 
  • CGT event A1 has not occurred, as beneficial ownership is maintained by being able to call the tokens back under a bare trust or nominee arrangement. 

The ATO has rejected this position by publishing this web guidance but has not provided detailed reasoning as to why. We expect that court cases will be the only method to clarify crypto tax law in Australia.  


The ATO’s position emphasises the need to understand the unique tax implications of DeFi lending and borrowing. It isn’t clear whether the ATO itself understands them, but taxpayers should be aware of the rocky shores of crypto tax in Australia and only disregard the ATO’s view after seeking proper advice.

This material is produced by Cadena Legal, an NSW registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here  

Recent Posts