The Daily Gwei Crypto Tax AMA
For those of you who have gone down the rabbit hole without understanding the tax consequences, this is for you.
On Friday, February 4th, we did an AMA in The Daily Gwei Discord channel hosted by Anthony Sassano, and guest CryptoTaxLawyer#1317 to help us answer the most challenging questions.
Is this only applicable to tax in Australia? Or are other countries covered too?
No it isn’t, we have tax experts from AU, CA, and the USA in this discord. CTC supports the tax legislation of over 20+ countries.
Any thoughts on the staking announcement in the US?
The staking announcement is not worth getting your hopes up over quite yet. It is a pretty standard tactic in the courts where the government drops an issue before there is a ruling on it. As of right now, the only development was that the IRS has issued a refund. The actual hearing will be in a week or two where the parties will discuss the matter of why the Defendant didn't accept the settlement offer.
Obviously the Proof of Stake Association does not want to simply win $3,000 in taxes. It wants clarification on the treatment of staking rewards. So they will push for a final ruling, the government will argue the case is now moot in an attempt to keep things as unclear as possible until they can just have legislation passed. Whatever the result, we know Congress is going to change things up eventually, so this would likely be a temporary victory, at best.
What can you tell us about your integration roadmap? Even if you cannot give us specifics it would still be good to have an idea which L1's or L2's you consider high, med, low priority.
We have been focused on AVAX most recently, next up is Terra and a few of the L2s. Overall the integrations of L1s and L2s are a top priority for us given that this is our bread and butter. Watch this space
How is tax handled around self repaying loans through protocols like Alchemix where you borrow against your assets (equity loan) but never have to make a repayment?
This arrangement doesn't have a clear answer from the IRS, but if I were to be forced to make the call, I would say the 'staking rewards' earned by the assets locked up as collateral would be 'income' that you pay taxes on. The question though would be, "Who earns the income?" It is a neat arrangement for collateralizing your assets, but really it is just a combination of a loan and a staking contract. Instead of paying interest out of pocket, you're just using the staking rewards to pay the interest instead.
I haven't seen this project in-depth yet, but I wonder who the IRS would attribute the staking rewards to. It could be argued that its to the borrower to pay off the interest, but on the other hand one could argue that it is the platform who's staking the assets and earning income, and for the privilege is giving out an interest-free loan. Its something that would need a full-blown legal memo to figure out. And I can't do that right now. Great question!
Does CTC view bridging to L2s as taxable events?
This is dependent on your region - some regions consider this a taxable event, some don't. One thing we have in our roadmap is a 'bridging' category, so you'll be able to define whether it's taxable or non-taxable depending on what region you're in. We're currently talking to a few tax professionals in different regions to get their thoughts on this as well
Do you treat wrapping and unwrapping of ETH or other assets (e.g. KLIMA) as taxable events?
Wrapping assets changes the underlying token properties, and in the case of wETH and ETH, there are actually markets for both which can be arbitraged. From the guidelines we have received, this would mean that wrapping would be classified as a taxable event.
If I want to enter the web3 space as a dev, are there any special US tax laws that apply if I'm working for a DAO or receive my payment in a crypto that I should be aware of?
You'd need to report the income as income at the USD value of the property at the time you received it. The main issue with DAOs is not necessarily the payment of contractors, its the lack of a central body to issue 1099's to said contractors.
Working for a DAO would be akin to freelance work where you didn't receive a 1099. Receiving crypto is tricky if you have an asset that loses value. You need to track the value when you receive it as income, but if it bottoms out and you don't have that value anymore, you're still on the hook for the USD value at the time of receipt. For some people it isn't a big deal. For others it ends up putting them in a really bad position.
How do I assess the value of an NFT if I transfer it from my personal ownership to my Trust account? As it is a transfer and should incur a capital gain/loss. Would I use the floor price of the collection?
I would probably talk to your tax professional about this. Using the floor price sounds reasonable, if it is part of a collection you could probably also look at the rest of the collection to determine a valuation
What is the tax treatment on something like "Beefy Finance" where you deposit in, it autocompounds farming rewards for you, and then you pull it out at some point?
I have seen a lot of different positions on this. A lot of the arguments are based around when you become a beneficial owner. For example, do you have beneficial ownership on the interest when you withdraw back to your wallet, or is it actually your choice to leave it in the pool, so the interest earned as it enters the pool itself is the point when you have received the interest. Depending on the smart contract, the later position is actually extremely complex to calculate, and you would have to derive the interest based on how many participants are in the pool on a per-block basis etc. Another position I have seen is that if you deposit into a pool and receive an LP token in return then this is disposal for another asset. The recent news around the IRS staking rewards conflates this further, perhaps the income is now not realized until there is disposal. Depending on your tax jurisdiction, there hasn't been a lot of very clear guidelines on this topic yet. Probably the wisest view is to work with your tax professional to determine what makes sense given your individual circumstances, and then if the tax authority comes back with a different view you can amend your return to get a refund or pay the difference. The most important thing is that you are proactive and make a reasonable attempt of paying your taxes.
For U.S. based -- Does staking through Lido or Rocket Pool create a cap gain for the ETH that's being staked? Assuming I'm not running a node, simply staking direct through those pools.
Conversion to rETH could be considered taxable. Like most other 1:1 transactions where the new token has some extra property, the odds are the token will be considered different enough to trigger a capital gains event. But it is also a matter of enforcement and the philosophical 'what does it mean to be the same'? Kind of question. rETH accrues extra rewards, this is different than ETH. So once could argue that it is taxable. However, this also applies to BTC & wBTC or ETH & wETH. After all, gas fees and transaction times are different features too. Even though the underlying token provides little over value. In short, I can't give a straight answer. If you're taking a conservative approach, it would be taxable. If you're taking an aggressive stance, it is not taxable. But I'd lean toward it being taxable by virtue of receiving a token for a token. This is a trade, through and through. You can argue otherwise, but its risky.
Can we deduct all of our gas or does it have to be specific to a transaction?
Depends on your jurisdiction and individual circumstances. Most countries are okay with adding transaction fees from sales onto your cost basis. Things get mirky when you consider out-of-pocket expenses like transferring between wallets or authorizing smart contracts etc. The UK HMRC specifically said you can't claim this as an individual. Countries like AU don't have specific guidance on this yet. If you are set up as a business this is all quite different. You also need to consider the gain/loss on the disposal of the crypto to pay the fee.
Last In First Out will save me money for 2021 taxes, but it seems a bit confusing to me... any tips?
Last In First Out is an inventory method that is not particularly favored by a lot of tax jurisdictions - you should certainly talk to your tax professional before using it. Having said that, the remaining inventory needs to be tracked between years regardless of what you use (e.g. First In First Out, Highest In First Out, Last In First Out etc).
If you’re looking for answers to complex crypto tax questions, feel free to reach out to CryptoTaxLawyer via u/CryptoTaxLawyer on Reddit, @CryptoTaxLawyer on Telegram, CryptoTaxLawyer#1317 on Discord, or [email protected] via email.
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