Crypto wrapping contract

The ATO has also issued a draft Determination (TD 2026/D2) that looks at the CGT consequences of certain wrapping contracts.

Wrapping contracts are a type of smart contract that involve the exchange of a crypto asset for its wrapped equivalent, often to enable compatibility with particular DeFi protocols or platforms.

The determination applies to wrapping and unwrapping arrangements that follow a specified seven-step pattern:

1. Transferring crypto asset A to a wrapping contract
2. Wrapping contract locks crypto asset A
3. Minting crypto asset B on a 1:1 basis with the locked units of crypto asset A
4. Newly minted crypto asset B can now be used in decentralised finance (DeFi) protocols or traded
5. Unwrapping crypto asset B - call the withdraw function on the wrapping contract
6. Burning crypto asset B - when the withdraw call executes, the wrapping contract burns crypto asset B
7. Releasing crypto asset A - the contract sends the corresponding amount of crypto asset A back to your wallet address.

The ATO’s view is that CGT event C2, rather than CGT event A1, applies when a crypto asset is wrapped. This is because the ATO considers that transferring the asset to a smart contract does not involve a transfer of ownership to another legal entity, which is required for CGT event A1.

Further, the ATO considers that two separate CGT event C2 events can arise:

• Wrapping: CGT event C2 occurs when the original crypto asset is transferred to the smart contract and the taxpayer’s ownership of that asset ends. The capital proceeds are generally the market value of the wrapped asset received, while the cost base of the wrapped asset is generally the market value of the original asset at the time of wrapping.
• Unwrapping: A second CGT event C2 occurs when the wrapped asset is burned by the smart contract. The crypto asset released back to the taxpayer is treated as a new CGT asset, rather than a continuation of the original asset. The capital proceeds are generally the market value of the asset received, with its cost base based on the market value of the wrapped asset at the time it is burned.

That is, each wrapping and unwrapping transaction may give rise to a separate CGT event, potentially resulting in significantly more CGT events for taxpayers actively using wrapped assets in DeFi arrangements.

The draft determination also confirms the ATO’s view that CGT rollover relief under Subdivision 124-B is not available. The wrapping of an asset is not considered an involuntary loss or destruction, while the asset received on unwrapping does not constitute compensation for the purposes of the rollover provisions.

Practitioners with clients using wrapped crypto assets should consider whether historical transactions have been treated consistently with the ATO’s proposed position.

For more information see here.