Kava Tax Guide
Kava is a decentralized lending and borrowing platform that combines the speed and interoperability of the Cosmos SDK with the developer power of Ethereum. It uses a native token called KAVA, which is used as collateral for loans on the platform. The Kava platform leverages ‘zones’, a feature in the Cosmos ecosystem, which enables borrowers to use assets such as BTC, BNB, XRP, and more when using Kava.
This integration serves to provide Kava users with a low-friction way to stay tax compliant. It allows for the automatic importing and categorization of users’ Kava transaction activity; something that anyone who has ever engaged with a DeFi protocol before will know is usually a huge pain point at tax time.
Let’s dive right into it! Here’s a quick and easy breakdown of how to import your Kava transaction history into CryptoTaxCalculator:
- Locate and copy the wallet address/es associated with your Kava account. This will be accessible via the wallet you used to connect to the Kava network originally (e.g. if you use Metamask, navigate to the Kava Andromeda network and you’ll be able to copy your wallet address from there).
- In CryptoTaxCalculator enter Kava into the search field or scroll down and select it from the list.
- Enter your Kava wallet address into CryptoTaxCalculator, provide an optional nickname, and click Add Wallet. It is possible to add multiple wallet addresses after you add the first.
- Your wallet/s will now sync and CryptoTaxCalculator will pull in all the transactions associated with your Kava wallet.
Crypto Tax Guide for Kava
No matter the rhyme or reason for you hopping over the metaphorical bridge to Kava’ layer 2 solution, CryptoTaxCalculator is the product for you to manage your transaction activity heading into the tax season.
Once you’ve imported your Kava wallets into CryptoTaxCalculator, you will see that your transactions on Kava have been imported into the app when navigating to the ‘review transactions’ tab. Our algorithm will auto-categorize the majority of these transactions. If there are any transactions that haven’t been able to be identified and/or categorized, you may need to manually adjust these. For information on how to correctly do so, please refer to our guide here.
Bridging and Kava
Let’s start with the usual first port of call for users who have transacted on Kava’ layer 2. Kava can trustlessly move assets from the Ethereum mainnet to Kava chain and back again. Any asset/asset type can in principle be bridged, including ETH, ERC20 tokens, ERC-721 tokens etc.
Bridging from Ethereum mainnet to Kava
- If you bridge any asset into Kava via a smart contract bridge, this conversion is likely to be considered a transfer event (i.e. no ownership change) and only the transfer fees incurred will be seen as taxable. As bridging occurs between two chains, you will need to import both your Ethereum wallet and your Kava wallet to obtain the complete transaction history needed to finalize your tax return. Once you’ve imported both wallets, CryptoTaxCalculator will be able to recognize the transfers vs the transfer fees incurred and categorize these transactions accordingly.
Bridging from Kava to Ethereum mainnet
- If you have an asset in Kava that you decide to move back to Ethereum mainnet, this is likely considered a transfer event and once again, only the transfer fees incurred are taxable. There are two parts to this action; Kava and Ethereum mainnet. When you execute a withdrawal from Kava, funds from your Kava wallet are used to power this. To receive the withdrawal on Ethereum mainnet, processing power is also needed - thereby funds on your ETH mainnet wallet are used. These two instances of transfer fees will be taxable, so make sure you import wallet addresses from both protocols.
Bridging to Kava via a fiat-based on-ramp
- If you’re using a fiat-based on-ramp like Transak to purchase cryptocurrency with a local currency (e.g. USD, AUD, GBP etc), this purchase is likely not considered a taxable event as you are not disposing of any cryptocurrency to do so. Similarly, you’ll notice that the fees paid to both the on-ramp product and network are paid in fiat, so these will likely not be taxable either. What does need to be taken into account is that the cost basis of your crypto for future CGT taxes will include these fee costs.
Bridging to Kava via a supported Exchange
- If you’re someone who has bought a token on an exchange, and have then transferred it to Kava via direct integration, this is the section for you. As mentioned earlier, the transfer of your asset from an exchange to Kava is not a taxable event, as the asset is not changing ownership. However, any fees incurred are. Once again, you will need to import both your Kava wallet and your associated exchange wallet address into CryptoTaxCalculator to form a complete tax return.
- Kava: Once your Kava wallets are imported into CryptoTaxCalculator, you will be able to see the transfer of the relevant tokens when they are sent to Kava via the above avenues. You will also be able to see the transfer costs associated with this action.
- Ethereum mainnet: To correctly determine the transfer fee of the bridged asset, you will need to import your associated Ethereum wallet where you received the token from the Kava network. CryptoTaxCalculator will then automatically categorize this transfer and associated fee.
The platform you’re using to stake tokens on Kava will determine what type of taxes you’ll be required to pay. If the platform you’re using allows you to stake your tokens for a designated period of time, with no LP token given in return, it is likely that only the staking rewards will be treated as taxable income at the point of claiming. If the platform you’re using allows you to stake your tokens for a period of time and you receive an LP token in the meantime, this will likely be considered a crypto-to-crypto transfer. This is because you’re technically passing ownership of your original asset into the staking pool’s custody in exchange for another token. This means that this will be recognized as a disposal event, and you will have to be aware of the market price at the time of disposal for both the original token and the token you received. If there are any gains or losses on the market value of either token between the time of disposal and the time of reward, you will be subject to CGT taxes. Our software recognizes these transactions as such, and will help you categorize them accordingly.
In most jurisdictions any gain from acting as a validator is taxable as ordinary income at its market value on the date you receive it. Depending on the length of time the validation period is set will affect how often these taxable events occur. If at a later date the validator sells the crypto received as a validation reward, it will be subject to capital gains tax. Our product has options to register different types of income received through activities such as validating.
Swapping / Trading / Lending / Borrowing
With dApps like Annex, Elk Finance, Curve and more being built or integrated with Kava comes a whole batch of taxable events associated with swapping, sending, receiving, trading and/or borrowing tokens. In most cases, all of these actions likely incur a ‘disposal’. An example of a taxable event within the DeFi world of Kava would be lending tokens via a lending protocol such as Annexin order to earn interest. When lending assets, a user will have to put a supported asset into a lending pool. This would only be viewed as a taxable event if you receive a token in return for proving lending supply. If this is the case, receiving this additional token would trigger a Capital Gains Tax event. Receiving the interest gained for lending your crypto will also be viewed as a taxable event. If you receive the interest in the form of the token you lent (e.g. you lent ETH and received ETH as interest), this will likely be considered taxable income. If you receive the interest in the form of a token different to the one you lent (e.g. you lent ETH and received KAVA as interest), this will likely be taxed with CGT. CryptoTaxCalculator recognizes these transactions, and once the data is imported into our platform, the algorithm will categorize them for you.
Just like on Ethereum mainnet, the cornerstone of Kava is the ability to build dApps on the protocol. Whether you’ve purchased jpegs from an NFT marketplace like Kanvas , or you’re providing liquidity on a DEX like Elk Finance, whatever your activity on a Kava-based dApp; we’ve got you covered. The taxable events and types of tax incurred will vary depending on your activity and the dApp used. Our software covers these with our wide range of categorization options. If something isn’t recognized immediately by our algorithm, you have the power to manually add the type of transaction it was. How good!
Low Fees =/= No Fees
A large part of Kava’ value offering is the lower fees in comparison to fees on Ethereum mainnet. We wanted to drill this particular point home, because ‘lower fees’ does not mean ‘no fees’. With tax compliance and Kava, you will need to find a way to track each and every one of your transaction fees. Now, you could use our calculator to do so OR you could do it yourself - either way, it’s an important enough note to wrap up this Kava tax guide with.
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