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ASIC released its updated Information Sheet 225 (INFO 225) on 28 October 2025, which attempted to bring clarity to when digital assets are financial products under Australian law and on licensing expectations.
The regulatory community is largely very upset about this guidance as impractical for most players, but at least clarify on what needs to be done.
"This has made a lot of people very angry and been widely regarded as a bad move."
- Douglas Adams, The Restaurant at the End of the Universe
But there's another lurking problem that nobody is talking about. The regulatory clarity creates a subtle kind of tax chaos.
In my view, many digital asset products will become commercially unviable in Australia, not because of regulatory burden alone, but because of punitive and uncertain tax treatments. This article examines five significant tax issues that INFO 225 has exposed or worsened. Some have been unresolved for over eight years despite repeated industry submissions. Others are new complications arising from the financial product classification. All of them need urgent attention from Treasury and the ATO.
INFO 225 regulatory framework summarised
I am not a regulatory law expert, but I know enough to be dangerous, so I'll do my best to summarise the changes.
INFO 225 replaces the term "crypto-assets" with "digital assets" and provides 18 worked examples showing when assets fall within financial product definitions under the Corporations Act 2001. The key distinction is straightforward; Bitcoin and Ethereum are not financial products, they remain "digital currency" for regulatory purposes.
Stablecoins, wrapped tokens, yield-bearing tokens, and tokenised securities are likely financial products. Depending on their features, they may be characterised as managed investment schemes, derivatives, or non-cash payment facilities.
This matters because financial products trigger:
- AFSL requirements
- PDS obligations
- Custody standards (minimum $10 million net tangible assets)
- Client money handling rules
- Disclosure and conduct obligations
ASIC has provided a transitional no-action position until 30 June 2025 for entities genuinely working toward licensing. The regulatory framework is now relatively clear, even if disappointing to many regulatory lawyers.
The tax framework is, however, not clear and this makes it worse.
Issue 1: The GST credit denial
This problem has existed since crypto exchanges were first classified as making input-taxed financial supplies. INFO 225 doesn't change the GST treatment at all, Bitcoin, USDC, and any other digital asset remain input-taxed financial supplies whether classified as digital currency, non-cash payment facility, or managed investment scheme. The 10% cost disadvantage remains identical.
What INFO 225 does is multiply the compliance burden without providing any relief. An exchange offering multiple digital assets must now:
- Classify each asset for regulatory purposes (digital currency vs NCPF vs MIS)
- Apply different custody requirements for each classification
- Maintain separate operational procedures for different product types
- Track different fee structures across product categories
- Document why each classification applies and maintain evidence
- Apportion acquisitions across product types even though the GST outcome is identical
Every acquisition must be tracked to determine what percentage relates to input-taxed supplies (all crypto sales to residents), GST-free supplies (crypto sales to non-residents under section 38-190), or taxable supplies (facilitation fees or other services). The apportionment methodology is set out in GSTR 2006/3. The ATO expects contemporaneous documentation showing the methodology, how it reflects actual use, and supporting calculations.
Before INFO 225, an exchange tracked acquisitions across one category of input-taxed supply. After INFO 225, it tracks acquisitions across multiple regulatory categories that all produce the same GST outcome but require different documentation, different systems, and different compliance processes. The cost disadvantage doesn't change. The compliance cost to bear that disadvantage increases significantly.
Issue 2: The Trust Arrangement Void
The DAP legislation is a regulatory framework, not a tax ruling. It creates licensing requirements and mandates trust arrangements for licensed platforms. It says nothing about CGT treatment which is understandable. Treasury's mandate stops at financial services regulation. Tax characterisation remains with the ATO, and the ATO has issued no guidance.
When a customer deposits Bitcoin onto an Australian exchange, is that a CGT event? After eight years of industry asking Treasury for guidance, there is still no definitive answer. The draft Digital Asset Platform legislation attempts to resolve this by mandating trust relationships or custodians but creates as many problems as it solves.
This issue was raised in the 2017 Senate FinTech Inquiry, the 2018 Treasury crypto consultation, the 2021 Senate Select Committee on Australia as a Technology and Financial Centre, in multiple submissions responding to INFO 225 consultations, and in submissions on the draft DAP legislation. Neither Treasury nor the ATO has responded on the tax characterisation question.
The draft Digital Asset Platform legislation mandates that licensed platforms must hold digital tokens "on trust for, or on behalf of" clients. This resolves the characterisation question for licensed platforms going forward; deposits to licensed DAPs won't trigger CGT because beneficial ownership is retained logically, but some investigation is still required.
The question hinges on whether the exchange holds crypto as trustee so that a bare trust exists for tax purposes.
If the exchange holds crypto as trustee: The customer retains beneficial ownership. The deposit is merely a change of custody. No CGT event occurs. The customer's cost base is preserved, and CGT event A1 only occurs when they actually dispose of the asset by selling or trading it. Clearly the preference.
If the exchange takes legal and beneficial ownership: When the customer deposits, they dispose of their Bitcoin to the exchange. CGT event A1 occurs immediately. The customer receives in return a contractual right to receive equivalent Bitcoin back, which is a different CGT asset with a new cost base equal to the market value at deposit. When the customer later withdraws, another CGT event occurs.
The ATO confirmed in Class Ruling CR 2024/50: Digital Surge Pty Ltd – voluntary administration that if there is no trust relationship, deposits to the exchange are merely debts owed, which is a distinct CGT asset to the underlying crypto. This reflects what most centralised exchanges put in their T&C's.
Most customers believe the CGT event occurs when they trade, not when they deposit. If the deposit is actually the disposal event, there's likely mass non-compliance.
But the draft legislation creates three new problems.
First, the exemption gap. Platforms holding less than $5,000 per customer and facilitating less than $10 million in transactions annually are exempt from licensing. These exempt platforms have no trust requirement. Customers depositing to small exchanges still don't know if they've triggered a CGT event. The legislation creates a two-tier system where licensed platforms use trusts, but exempt platforms operate under unclear arrangements.
Second, the sub-custody problem persists. Smaller licensed platforms that can't meet the $10 million net tangible assets requirement must outsource custody to third-party custodians. If the third-party custodian holds assets on trust for the exchange, and the exchange holds obligations to customers, how many trusts exist? Is the customer the beneficial owner through a sub-trust, or does the deposit to the exchange trigger CGT because the customer has contractual rights against the exchange rather than beneficial ownership of the underlying crypto? The draft legislation says nothing about custody chains.
Third, no retrospective clarity. The draft legislation provides no transitional provisions for deposits made over the past eight years under unclear omnibus arrangements. Customers who deposited crypto to exchanges between 2017 and 2025 still don't know whether those deposits triggered CGT events. The legislation doesn't deem historical arrangements to be trusts or provide safe harbors.
The tax analysis for unlicensed platforms or sub $10m NTA platforms remains unclear. Exchange terms of service sometimes say customers retain ownership, suggesting trust characterisation, but unlikely to the level required to actually be a trust. But omnibus accounts mean the exchange has legal title and customers have contractual rights that may not be property rights. The insolvency treatment is uncertain. Australian case law is silent on this. Unlike the UK or US, we have no definitive judicial guidance on whether crypto exchange custody creates a trust relationship outside the statutory mandate.
Issue 3: The Withholding Tax Trap
If yield-bearing stablecoins or staking arrangements are managed investment schemes under INFO 225, distributions to customers trigger withholding obligations that no Australian exchange has infrastructure to handle. The compliance burden is staggering, the commercial impact makes yield products unviable, and the penalty for non-compliance is up to 100% of amounts not withheld.
Consider an exchange offering a yield-bearing USDC product paying 5% APY. A customer deposits $100,000 USDC and receives $5,000 annual distributions. If this is a managed investment scheme, withholding applies.
For Australian residents without a TFN: The exchange must withhold at 47% under the TFN withholding rules. That's $2,350 withheld from a $5,000 distribution. The customer's actual yield drops from 5% to 2.65%.
For non-residents: If the distribution is interest under section 128B of the Income Tax Assessment Act 1936, withholding applies at 30% or the treaty rate. If it's a managed investment trust distribution, MIT withholding applies under Division 12A of Schedule 1 to the TAA 1953, again at 30% or the treaty rate. Customer yield drops from 5% to 3.5%.
Most exchanges currently have no TFN/TIN collection process, no withholding systems, and no capability to report via the ATO's integrated activity statement system.
The compliance requirements for a single yield product with 10,000 customers include:
- Collect TFNs and ABNs from all Australian residents
- Determine residency status of all customers
- Determine treaty entitlement for each non-resident
- Withhold at different rates depending on residency and treaty status
- Issue distribution statements to all customers
- File quarterly withholding reports to the ATO
- Remit withheld amounts monthly or quarterly
Building this infrastructure requires legal advice on characterisation, tax engine development for multiple withholding rates, integration with ATO reporting systems, customer onboarding changes to collect tax information, and reconciliation systems for crypto-denominated distributions. The cost runs into hundreds of thousands of dollars for a single product that may become commercially unviable once withholding applies.
The commercial impact is that yield products cannot compete. A customer expecting 5% yield could only receive 2.65% after domestic TFN withholding or 3.5% after non-resident withholding. Offshore platforms that don't withhold offer the same product at 5%. Customers leave Australian platforms, or Australian platforms stop offering yield products entirely.
This forces exchanges into three impossible positions:
Option 1: Stop offering yield products. This eliminates a major revenue stream and customer acquisition tool. Customers move to offshore platforms. Australian exchanges lose market share in one of the fastest-growing segments of the digital asset market.
Option 2: Limit products to customers who provide TFNs and residency declarations. This drastically shrinks the addressable market. Many customers won't provide this information, particularly international customers who use multiple platforms. Onboarding friction increases. Customer acquisition costs rise. The product becomes commercially marginal.
Option 3: Ignore withholding obligations and face penalties. Section 284-75 of Schedule 1 to the TAA 1953 imposes penalties of up to 100% of amounts not withheld for failure to withhold when required. An exchange with $50 million in annual distributions faces potential penalties of $50 million if it fails to withhold and the ATO takes enforcement action.
There's a fourth characterisation risk that INFO 225 doesn't address. If staking rewards or stablecoin yield is interest rather than a managed investment scheme distribution, section 128A includes in the definition of "debenture" any document acknowledging a debt. Does a stablecoin that promises redemption at par create a debt? If so, distributions may be interest subject to section 128B withholding at 30% for non-residents, even if the arrangement isn't a managed investment scheme.
The definition of interest in section 128A(1AB) includes "any amount in the nature of interest, or in substitution for interest." Yield on a stablecoin that maintains a stable value and pays returns based on underlying asset performance could be characterised as interest, triggering withholding even if ASIC doesn't classify the product as a debenture.
INFO 225 provides no guidance on debt characterisation. It focuses on whether products are managed investment schemes, non-cash payment facilities, or other financial products. It says nothing about whether stablecoins create debts for tax purposes, leaving exchanges exposed to an argument they haven't considered and can't easily resolve without ATO guidance. The draft Digital Asset Platform legislation doesn't address withholding. It creates licensing requirements and custody obligations. It says nothing about how withholding applies to distributions made in crypto, whether exchanges can net withholding against crypto distributions, or whether simplified reporting mechanisms exist for small distributions.
Practical problems multiply. If a customer receives 5 USDC as a distribution and 47% withholding applies, does the exchange withhold 2.35 USDC and remit the AUD equivalent to the ATO? What's the exchange rate? When is it determined? What if the USDC depreciates between distribution and remittance? Who bears the FX risk?
If a customer receives staking rewards in ETH and non-resident withholding applies at 30%, does the exchange withhold 0.3 ETH from every 1 ETH reward and convert it to AUD for remittance? What if the customer has already withdrawn the ETH? Does the exchange pursue the customer for the withholding amount, or does it bear the liability?
Issue 4: The Transfer Pricing Adjustment Risk
Many Australian exchanges operate through structures with an Australian entity facing customers and an offshore entity holding inventory. INFO 225 fundamentally changes the transfer pricing analysis for these structures, but most exchanges haven't adjusted their related party pricing. The consequences of ATO adjustment are severe: additional tax, penalties up to 75%, and general interest charge compounding over multiple years.
A typical arrangement has the Australian entity charging a 0.5% trading fee to customers and paying 0.4% to the offshore parent for liquidity provision, retaining a 0.1% margin. This structure predates AFSL requirements and continues for regulatory capital efficiency and access to offshore liquidity.
The question is whether 0.1% remains arm's length under Division 815-B when the Australian entity now bears AFSL compliance costs, custody obligations under INFO 225, AML/CTF compliance, dispute resolution systems, and the $10 million net tangible assets requirement.
A functional analysis suggests the Australian entity should retain significantly more profit. It has increased functions, assets, and risks following INFO 225. The offshore entity provides liquidity, but the Australian entity now:
- Holds an AFSL with ongoing compliance costs
- Maintains segregated custody under RG 133
- Manages AFCA membership and customer complaints
- Bears AML/CTF obligations including transaction monitoring
- Maintains $10 million NTA for omnibus custody
- Faces direct ASIC supervision
- Carries operational and reputational risk for customer-facing activities
The existing 0.1% margin doesn't reflect these increased functions and risks. Most exchanges haven't adjusted because INFO 225 is recent, transfer pricing reviews are expensive, and changing allocations triggers questions about prior years.
The ATO is reviewing digital asset structures, particularly where Australian entities function as low-margin marketing hubs while offshore parents retain most profit. These reviews focus on whether the Australian entity's functions, assets, and risks justify the allocated margin.
If the ATO adjusts transfer pricing, the numbers are brutal. For an exchange with $100 million annual Australian revenue currently allocating 1% margin to the Australian entity, if the ATO determines the arm's length margin should be 5% after INFO 225 costs:
- Additional profit: $4 million annually
- Tax at 30%: $1.2 million
- Penalty (25-75%): $300,000 to $900,000
- General interest charge over three years: $200,000 to $400,000
- Total cost for three years: $4.5 million to $6.3 million
- Plus ongoing requirement to maintain higher Australian margins
Most exchanges have no transfer pricing documentation, no contemporaneous functional analysis, and no benchmarking studies. Under section 284-255 of Schedule 1 to the TAA 1953, documentation must be prepared by the lodgement date to obtain penalty protection. Historical documentation prepared after an ATO review provides no protection.
Exchanges operating through related party structures need to urgently conduct functional analyses under the INFO 225 framework, obtain transfer pricing benchmarking studies comparing Australian entity functions and margins to comparable independent distributors, and prepare contemporaneous documentation. For material structures, advance pricing agreements with the ATO should be considered to obtain certainty on appropriate margins before the ATO commences review activity.
Issue 5: The Customer Migration Problem
The combination of these tax issues creates an inevitable outcome: Australian customers will migrate to offshore exchanges or self-custody for any product classified as a financial product under INFO 225.
The economics are straightforward. Australian exchanges face:
- GST credit denial creating a permanent cost disadvantage
- Withholding obligations that destroy yield product economics
- Transfer pricing adjustments increasing costs
These costs must be passed to customers through higher fees or reduced yields.
Offshore exchanges serving Australian customers face none of these costs. If they're not registered for Australian GST, they don't breach the financial acquisitions threshold and maintain full credit entitlement. If they don't have an Australian establishment, they're not required to withhold on distributions. They're not subject to INFO 225 custody requirements or transfer pricing scrutiny.
The regulatory arbitrage is complete.
ASIC claims extraterritorial reach over offshore platforms targeting Australian users. The draft Digital Asset Platform legislation states a facility can be "operated in this jurisdiction" even if based overseas. But practical enforcement is difficult. Offshore platforms can block Australian IP addresses to avoid jurisdiction while still serving Australian customers through VPNs. Enforcement requires cooperation from foreign regulators who may not prioritise Australian retail protection. And even if enforcement succeeds in blocking offshore platform access, customers can move to self-custody.
Self-custody via hardware wallets or non-custodial software eliminates exchange involvement entirely. Customers can access DeFi protocols directly, trade peer-to-peer, or use decentralised exchanges. The tax treatment is clearer for self-custody in many respects—CGT applies on disposal, cost base is tracked by the customer, and there's no ambiguity about trust arrangements or withholding obligations.
The ATO is enhancing on-chain analysis capabilities and runs data-matching programs with exchanges, but surveillance is less comprehensive for self-custody users. From a compliance perspective, the burden shifts entirely to the taxpayer, but many customers will accept that trade-off to avoid the costs and restrictions of licensed Australian exchanges.
The customer segmentation becomes predictable:
Sophisticated users move to offshore platforms or self-custody to access lower fees, higher yields on staking and lending products, and broader product ranges without Australian regulatory restrictions.
Retail users remain on Australian platforms but face higher costs due to GST credit denial, reduced yields after withholding, and fewer product offerings as exchanges exit complex products they can't profitably offer under the new framework.
Institutional users establish offshore entities to access digital asset products outside the Australian regulatory perimeter, or demand that Australian exchanges provide institutional-grade pricing that absorbs the regulatory cost disadvantage.
The local industry loses competitive position. Market share flows to offshore platforms. Australian exchanges focus on basic spot trading and custody services where regulatory costs are manageable, abandoning yield products, staking services, and sophisticated DeFi integration that now trigger financial product classification.
Tax revenue potentially flows offshore or becomes harder to collect. Customers using offshore platforms or self-custody have the same tax obligations—CGT on disposals, income on staking rewards, but compliance rates decline when the ATO has less visibility and customers lack automated reporting from Australian platforms.
INFO 225 was designed to protect consumers by bringing digital assets within the financial services regulatory framework. The unintended consequence is that it may drive sophisticated users to less regulated alternatives while imposing higher costs on retail users who remain on Australian platforms.
This is not the policy outcome anyone intended. The stated goal was to legitimise good actors and shut out bad actors. The actual result may be that good actors bear costs that make them uncompetitive, bad actors continue serving Australian customers from offshore jurisdictions, and the regulatory framework creates a two-tier market where Australian platforms service only the least sophisticated retail segment while everyone else exits to less regulated alternatives.
What Comes Next
INFO 225 and the draft Digital Asset Platform legislation have created a framework that is theoretically comprehensive but practically unworkable. The regulatory burden is significant but manageable. The tax consequences are catastrophic. The regulatory consequences are probably as bad.
Australian exchanges now face an impossible choice: operate in full compliance and become commercially unviable or exit regulated products entirely and cede the market to offshore competitors and on-chain operators while offshore enforcement remains low. In my view, there is currently no option where Australian exchanges compete successfully with foreign exchanges in sophisticated digital asset products while bearing these costs and risks, unless this government listens and acts as industry tells them.
All industry participants can do is:
- Respond to consultation requests vigorously.
- Publicise the issues.
- Continue to lobby government.
- Hope and pray they listen.
Conclusion
Australia had an opportunity to lead in digital asset regulation. We have sophisticated financial services laws, strong and respected regulators, and early crypto adoption was high among Australian consumers. That opportunity has all but evaporated.
The problem is not regulatory ambition, as consumer protection is a legitimate objective. Custody standards, disclosure requirements, and licensing obligations all serve valid purposes. The problem is the absence of coordination between regulatory policy, regulatory enforcement and tax outcomes. ASIC has classified products as financial products without considering that managed investment scheme distributions trigger 47% TFN withholding. Treasury has mandated multiple custody arrangements with no thought to the unworkability outside regulatory law. Nobody has thought about how exchanges could possibly comply with transfer pricing documentation for structures that predate the regulatory framework.
Other jurisdictions have integrated regulatory and tax policy. Singapore, Switzerland, and the EU designed frameworks that considered both dimensions before implementation. They recognized that financial product classification has tax consequences and ensured those consequences were workable.
Australia has not done this. We've applied existing laws (with only the addition of the additional licensing requirements of SVF and DAP authorisations) without considering whether they function in combination. The result is a framework that looks great on paper but is unworkable in practice.
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