Hi there ATO team,
I hope you're well.
I have a couple of questions in relation to DeFi borrowing and lending mechanisms and their interaction with the Australian Taxation guidelines.
Let's consider the following hypotetical scenario:
Please, for simplicity, kindly disregard the interest incurred and the micro price fluctuations between assets in a flashloan as they are not the main focus.
DeFI lending protocol position:
Collateral
WBTC - equivalent to $1000
Loan:
USDC - equivalent to $300
Q1: considering taking these $300 in USDC and moving it straight to an exchange, to be sold/converted to FIAT ($AUD). This transaction would potencially incur in a tax loss, as there is a loss of around 3% charged as spread from the exchange. Hence, I would be ending up with less funds than $300 in my bank account. And the DeFi portfolio would be reduced by the $300 usdc loan exactly. Also, as it is crypto provenient from a loan taken by me, it is not revenue as well. Does my thought process proceed in accordance with the tax guidelines in this example?
Q2: DeFi lending provides a quite flexible scenario which wouldn't be "possible" to have under the traditional financial system.
With that said, within the same "account" in the DeFi protocol, I can take another loan by the same amount, repay the "original debt in USDC" and take another loan to replace it in WETH for example. All of this can happen in one block of transactions (seconds) - name flashloan.
If the price of WETH falls 30%, my current liability will fall in dollar amount, not in WETH units. So, if I take another loan as USDT to repay this WETH devaluated debt and reduce my overall liability, by now owing an amount of USDT 30% less in dollar terms than the original loan, it will trigger a tax event?
My understanding is that I'm only refinancing my debt.
So, by being the liability the changed factor here, not my assets, I'm inclined to assume that these transactions would not trigger a tax event for me as I'm not disposing any of my assets to repay it. Is that something correct to assume?
Many thanks
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