How to correctly categorize transactions
It is important to recognise the different categories of transactions as they each have different tax implications. CryptoTaxCalculator attempts to automatically map transactions back to categories that make sense from a traditional accounting perspective.
When importing data, CryptoTaxCalcualtor records the transaction type in lowercase, e.g: "buy", "sell", "airdrop", etc. To better understand these different categories, this article will provide an overview of each transaction category and their tax implications:
These are the default categories that are used if we are unable to auto-categorise the transaction or make a accurate assumption as to what the category should be. To be on the safe side, an 'Incoming' transaction is considered as an acquisition of the underlying asset (from a tax perspective), while an 'Outgoing' transaction is considered as a disposal of the asset, which will triggers a capital gains tax event. If we are not sure if it is either an 'Incoming' or 'Outgoing' transactions, we will assign the 'Unknown' category and you should update the category accordingly.
The 'Incoming' and 'Outgoing' transaction types will also impacts the balance remaining; an incoming transaction will increase your overall balance remaining, and an outgoing transaction will decrease this. The 'Unknown' transaction type will not affect the balance remaining.
A 'Buy' transaction represents the acquisition of the underlying asset (i.e. the purchase of the cryptocurrency). It used to calculate the cost basis for future cryptocurrency sales. This does not trigger a capital gains tax event.
A 'Sell' transaction represents the disposal of the underlying asset (i.e. the sale of the cryptocurrency). As a result, this sale triggers a capital gains tax event. The capital gain/loss is calculated based on the cost base of the asset (the price of at the time of sale + any additional fees incurred due to the acquisition/disposal of the asset) and the value of the asset at the time of sale.
Specifically, the capital gain/loss is the 'received amount' minus the 'cost base'.
A 'Transfer' transaction is used to represent the movement of an asset between different wallets, exchanges or accounts, where you maintain control of the underlying asset. As you do not 'dispose' of the asset, this transaction type does not trigger a captial gains tax event.
- Moving cryptocurrency from an online exchange to your hardware wallet.
- Moving fiat from your bank account to an online exchange.
A 'Chain Split' transaction is used if you acquired a new cryptocurrency as a result of a chain split (such as Bitcoin Cash being received by Bitcoin holders). There is no income or capital gains tax event at the time of receiving the new cryptocurrency. The new cryptocurrency received will have a cost basis of $0 for future trades.
Please note you must take care to determine which of the underlying assets is the 'continuation' of the original chain and which is the 'new' chain.
An 'Airdrop' transaction is used if you acquired cryptocurrency as a result of an airdrop. Proceeds from airdrops do not trigger an immediate capital gains taxable event but are classified as income and trigger an income tax event. Any future sale of the cryptocurrency is a capital gain event with a cost basis the same as the income price.
Example: You are airdropped 5 yearn.finance when its price is $100/YFI, and you sell a week later when the price is $10,000/YFI. Your income is $100 and capital gains is $9,900.
A 'Mining' transaction is used if you acquired cryptocurrency as a result of mining activities as a hobby (e.g. BTC mining). Any cryptocurrency you receive as a result of your mining will be considered a new asset with a cost base of zero. This means that if you sell or trade them, you’ll incur a capital gain equal to the total amount received.
Example: You mined 1 bitcoin when its price is $1,000/BTC, your cost base is zero. If you sell six months later when the price is $5,000/BTC, your capital gains are $5,000.
An 'Interest' transaction is used if you acquired cryptocurrency as a result of interest-bearing activities which don't suit any of the other categories (e.g. earnings from lending, DEFI yield farming, high-interest cryptocurrency savings account, etc. Note - Liquidity Pool Tokens (LPTs) do not count as income and are normal trade/crypto-crypto swaps (buy/sell)). Proceeds from interest do not trigger an immediate capital gains taxable event but are classified as income; any future sale of the cryptocurrency is a capital gain event with a cost basis the same as the income price.
Example: If you received 100 Sushi when its price is $10/SUSHI, you sell one month later when the price is $1/SUSHI, your income is $1,000 and capital loss is $900.
An 'Income' transaction is used if you receive cryptocurrency through a salary, wage or other form of general income (including referrals, completing surveys, etc). Proceeds are classified as income, based on the price when the transaction occurs. Any future sale of the crypto is a capital gain event with a cost basis the same as the income price.
A 'Personal Use' transaction is used if you have disposed of cryptocurrency for the purpose of purchasing goods or services.
A 'Lost' or 'Stolen' transaction is used if you have lost cryptocurrency or have had it stolen (e.g. 'rugged' by scammers). This will trigger a captial loss tax event, where the loss = ($0 - the cost base of the cryptocurrency).
A 'Realised Profit' or 'Realised Loss' transaction is used for when you have realised a profit or loss (respectively) on an for margin, futures, derivates, etc. type trades, where a profit or a loss has been realised on the trade. Proceeds from these trades count are classified as income.
A 'Gift' transaction is used if you have received cryptocurrency as a gift. Similar to a 'Buy' transaction type, the captial gain/loss is calculated based on the price at sale and price when the gift is received. Receiving cryptocurrency as a gift does not trigger a capital gains or income tax event.
A 'Fee' transaction is used if you have disposed of cryptocurrency to cover the cost of fees generated as a result of other transactions.
- Fees paid when withdrawing cryptocurrency from a centralised exchange to your personal wallet.
- Gas fees paid during on-chain Ethereum swaps when interacting with decentralised exchanges. You can read more details about Ethereum gas fees here: https://cryptotaxcalculator.io/guides/eth-gas-fees-tax
A 'Cashback' transaction is used if you have acquired cryptocurrency as a cashback (e.g. credit card cashback). Classified similar to a 'Buy' transaction type (the cost base at the time of accquisition), this transaction type does not trigger an income event.
An 'Ignore' transaction is used for ignoring a particular transaction from tax and balance calculations. This is a useful 'soft' alternative to deleting a transaction.
A "Failed" transaction is used for marking failed transactions (whether in or out). The transaction itself will be ignored from tax calculations, but any fees incurred from creating the transaction will be accounted for."
- You tried to send ETH to someone during a period of high network congestion and you ran out of gas.
All content in this article is general information only and does not constitute financial, tax or legal advice. It is not intended to be used by anyone for the purpose of financial advice, legal advice, tax advice, tax avoidance, promoting, marketing or recommending to any other party any matter addressed herein. For tax, financial or legal advice please consult your own professional.