Edited version of private advice

Authorisation Number: 1052344537848

Date of advice: 18 December 2024

Ruling

Subject: Cryptocurrency and liquid staking

Question 1

Does the activity of liquid staking X tokens trigger a CGT event under section 104-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You invest in cryptocurrency.

You have X tokens on the X blockchain.

You undertook liquid staking activities with your X tokens and its various liquid staking tokens (LSTs) across different platforms.

All the transactions, except a few were not linked with Decentralise Finance (DeFi) protocols.

You use tax software to record your liquid staking transactions.

You have provided web addresses to outline how the X tokens and LSTs work.

The information provided on the platforms about their liquid staking protocols (terms) include similar information, in particular:

•                When liquid staking X tokens you receive a new token (i.e. the LST) based on the platform's ratio of staked tokens.

•                You have control of the LST.

•                The LST grows in value in relation to the underlying staking returns.

•                You can trade the LST on centralised and decentralised platforms.

•                You can trade the LST for other crypto tokens including directly exchanging the LST for X tokens.

•                When you trade the LST you also trade the accumulated staking rewards.

•                Your staked X tokens go into a pool which is controlled by the platform.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-5

Income Tax Assessment Act 1997 subsection 104-10

Income Tax Assessment Act 1997 subsection 104-20

Income Tax Assessment Act 1997 subsection 104-25

Income Tax Assessment Act 1997 subsection 104-60

Income Tax Assessment Act 1997 subsection 104-155

Income Tax Assessment Act 1997 subsection 104-20

Income Tax Assessment Act 1997 subsection 108-5

Reasons for decision

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens.

Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. CGT assets include part of or an interest in property or a legal or equitable right that is not property.

Taxation Determination TD 2014/26 Income tax: is bitcoin a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997? explains that Bitcoin, and by extension, cryptocurrency in general is a CGT asset. The tax treatment of bitcoin can be applied to other crypto or digital currencies that have the similar characteristics as bitcoin.

Guidance on www.ato.gov.au provides that there are many types of crypto assets, with their form and function continuing to evolve. You can control different types of crypto asset in the same digital or hardware wallet. However, for tax purposes you need to treat each crypto asset you hold as a separate asset.

When participating in liquid staking, you send tokens to a smart contract or staking pool. In return for staking your tokens, you receive a different type of token that represents the value of your staked tokens. This new token is referred to as an LST.

The LST is redeemable for the tokens you have staked (plus/minus a share of rewards and fees). The new token can be traded, used as collateral in DeFi protocols or transferred while still earning staking rewards.

Application to your circumstances

You have X tokens on the X blockchain. You have undertaken liquid staking activities with your X tokens and have received various LSTs on various platforms.

You contend that your liquid staking activities should not trigger a CGT event at the time you stake your X tokens for LSTs tokens because:

•                At the time you exchange X tokens for LSTs there has been no sale of X tokens and there is no transfer of ownership.

•                The swap from X tokens to LSTs does not equal a trade and simply represents your original position.

•                The LSTs stay in your control the entire time and you are still the beneficial owner of the tokens.

Staking and liquid staking do not have the same characteristics. Whilst the LST can be equated to a X token, it is itself not X. When you stake X tokens, a stake account is created and the X tokens are locked up. The stake account is delegated to a validator. When you unstake your X tokens the stake account needs to be deactivated and then you withdraw your X tokens from the stake account. You do not lose ownership of the X tokens but are precluded from trading with them. In return you can receive rewards (additional tokens) from locking your X tokens.

When liquid staking, you stake your X tokens to a smart contract or staking pool and a stake account is created. The stake account is delegated to a validator and you get something in lieu of the X tokens you have staked, being a LST (i.e. a liquid version of your stake account). This LST represents new property. You own this new CGT asset both legally and beneficially.

Generally, the key difference between staking and liquid staking is that the former typically involves locking up tokens in a smart contract without the ability to use or transfer them until the staking period ends, whilst liquid staking gives the users a LST that represents ownership of the staked assets. These LSTs are transferable and can be used in DeFi protocols, which gives users additional liquidity and utility.

The LST tracks staking yields, but you can still freely trade and utilise the LST across DeFi or sell the LST to realise gains, without interrupting compound growth from the staked capital continuing to validate and earn rewards. When you trade the LST you are also trading your accumulated rewards. The LST is a fungible asset and can be used to carry out different transactions on centralised and decentralised platforms.

When liquid staking X tokens for LSTs you relinquish your X tokens for the LST and your staked X tokens are part of the relevant liquidity pool. Any redemption is from the liquidity pool and not because you have 'deactivated' your staked account with a validator. You are not receiving the original staked X tokens.

The 'Ainsworth test' was explained in TD 2014/26 at paragraph 7. A property right must be sufficiently definable, identifiable, capable of assumption by third parties, and permanent or stable to some degree. Given the need for definability, identifiability, permanency and stability, and given the material differences between the LST and associated X tokens outlined above, it is necessary to conclude that the LST is a distinct CGT asset from the staked X token. The two tokens would not exhibit these characteristics if treated as a single asset.

Accordingly, it is considered that the X tokens and LSTs are separate CGT assets.

CGT events

We consider LSTs to be separate CGT assets. When you receive LSTs for staking X tokens a CGT event generally happens because the beneficial ownership of the relevant X tokens ends because of the arrangement.

The most likely CGT events to happen are A1, C2, E2, or H2. The most specific CGT event depends on the structure and nature of your arrangement.

The X tokens and the associated LST will generally:

•                Have different functionality.

•                Simultaneously exist as separate entries on the blockchain.

•                Have separate traceable histories.

•                Bear different 'holding rights'.

•                Have different names.

The X token exists in a locked state in a smart contract address while the LST is accessible for general use on the blockchain.

You are liquid staking across different platforms with different protocols. The terms of the contract are unclear about whether you retain beneficial ownership of the X tokens. If the X tokens are simply locked in the smart contract and not accessible to any entity, a smart contract cannot legally own anything as it is not an entity. It is not clear whether the terms and conditions on the various platforms provide that the 'platform' or some other entity becomes the legal and beneficial owner of the X tokens when you stake them in the smart contract.

CGT event C2

The most specific CGT event applicable to your liquid staking is C2, whereby you have abandoned your X tokens to the staking contract. This is so notwithstanding that you intend to obtain the same quantity of X tokens upon 'unstaking' your X tokens.

When you lock a crypto asset in a liquid staking smart contract such that no other entity owns it, the relevant legal relationship between the person and the token which constitutes property is terminated. When the crypto asset is locked, the characteristics which make your legal relationship with a X token property, including those set out in paragraph 7 of TD 2014/26, disappear. The commercial value of the X tokens has been transferred to the corresponding LSTs.

A X token is not capable of assumption by third parties while locked, except in the sense that it may be acquired by other users of the smart contract (which suggests that it is not excludable). Crypto assets owe their property status partially to the fact that a person with access to the asset is ascribed holding rights, including the right to control the asset in their wallet by virtue of possessing the relevant private key (paragraph 8 of TD 2014/26). The Commissioner understands that no entity has such access or holdings rights in respect of the locked X tokens. No person has a sufficient degree of control over the X tokens necessary for ownership; Ruscoe v Cryptopia Ltd (in liq) [2020] NZHC 728 at [112].

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

(a)           Being redeemed or cancelled; or

(b)           Being released, discharged or satisfied; or

(c)            Expiring; or

(d)           Being abandoned, surrendered or forfeited; or

(e)           If the asset is an option - being exercised; or

(f)             If the asset is a convertible interest - being converted.

We consider that you have abandoned, surrendered or forfeited the original X tokens to the liquid staking smart contract. Your original X tokens no longer have the character of a CGT asset and have therefore ended for the purpose of subsection 104-25(2) of the ITAA 1997. The property interest in a crypto asset comes to an end when the value inherent in it is transferred to another asset; Ruscoe v Cryptopia Ltd (in liq) [2020] NZHC 728 at [117]; Re Blockchain Tech Pty Ltd [2024] VSC 690 at [386].

Upon redeeming your LSTs by returning them to the liquid staking contract and receiving a quantity of X tokens, CGT event C2 happens as your LSTs are abandoned, surrendered or forfeited to the smart contract and thereby destroyed (or alternatively CGT event C1 happens - loss or destruction of a CGT asset).

Alternative CGT events

The Commissioner understands that none of your liquid staking activities resulted in X tokens being sent to addresses where any other entity gained the degree of control over the tokens necessary for them to remain property. If this is wrong, and some other entity did receive access to your X tokens, then it may be that ownership of the X tokens has been transferred to the recipient such that CGT event A1 under section 104-10 of the ITAA 1997 may have happened. However, in the absence of an express contractual term transferring ownership to the purported entity (i.e., in the terms and conditions), there has been no change of ownership to another entity.

Alternatively, if contrary to the Commissioner's understanding of your liquid staking activities, one of your many transactions involves a custodian entity holding the tokens (rather than the X tokens being deposited into a self-executing smart contract), it is possible that CGT events E2 or H2 could apply at the time you stake X tokens and receive LSTs.

CGT event E2 applies when you transfer a CGT asset to a trust (section 104-60 of the ITAA 1997). This would require there to be a custodian entity that has fiduciary obligations. It is not evident that the platforms you are using to perform your liquid staking activities exhibit these characteristics.

CGT event H2 applies when there is an act, transaction or event that produces capital proceeds (section 104-155 of the ITAA 1997). This would require there to be a custodian entity and this is not evident in your circumstances.

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