Hi, I have posted previously asking how to value crowdloan rewards. I’d like add some more questions/concerns/suggestions here for the community to see. I will also use this post as the basis for discussion with the early engagement team.
Calculate coin value at time of custody
It seems sensible to me that taxpayers should calculate coin value at time of custody. The examples below describe specific coins and situations that are meant to be generic and apply to many other cryptocurrency mechanisms. Later I use KSM as an example for generic crowdloans for "Token A"; readers should regard KSM as interchangeable with DOT because both will have access to the same opportunities.
Airdrop value is calculated upon manual claim/custody, consider:
- ENS airdrop is claimed after trading is active. Thus if a user claims their ENS on 6/1/21 then they can knowingly calculate value at ~$33USD/ENS. Claiming on 30/11/21 would imply ~$70USD/ENS.
- SDL airdrops is claimed before trading is active. Here the coin cannot be valued or sold. A cost basis of 0 would be applied to all coins in custody. However, once a market appears, custody of additional coins either through airdrop vesting or farming would apply market value for both income and cost basis calculations.
- DBTC, an unsolicited scam airdrop direct to user wallets, with a hypothetical value of $9.95/unit on 7/1/21 has an income value and cost basis of 0. Capital gains event is triggered only on sale.
Farmed tokens are valued at time of manual claim/custody, consider:
- SUSHI earned from liquidity services is valued at time of custody, not dynamically. i.e. George earns 20 SUSHI from 20/8/2021 – 11/12/21. He first claims his rewards on the 11/12/2021 and applies a value of ~$5.50USD/SUSHI. If the farm ceases to offer rewards and George claims his 20 SUSHI on 31/12/21 then he would apply ~$10.25USD/SUSHI.
- Liquidity Pool tokens should be treated the same way. i.e. George provides USDC/DAI liquidity to a sushiswap pool and earns $300 in fees. George regards the $300 in fees as income when he redeems the LP tokens.
Interest and staking rewards with automatic custody, consider:
- DOT staked in on the network continuously earns rewards paid directly into a users wallet with full custody. These rewards would be valued dynamically at the time of custody of unlocked coins.
- DOT staked with Kraken earns rewards paid to the user account twice weekly. The user would calculate value twice weekly upon custody.
Coins Locked and Vested (unlocked), consider:
- Locked coins are not custodied. Until they are custodied, these are not subject to income or cost basis calculations.
- Vested and unclaimed coins are not custodied. Until they are custodied, these are not subject to income or cost basis calculations.
- Vested rewards are valued at the time of claim/custody. If claimed before the token has a market value the income and cost basis is zero. If claimed when the token has a market value then the same valueis applied.
I believe the above tax treatment is the sensible way to ensure that a taxpayer can
- dynamically monitor their tax obligations
- demonstrate agency and intent in decisions that incur taxable events
- submit ledger transactions as evidence of such intent
- fairly manage their investment strategy.
If the taxable event is calculated at time of custody, it seems reasonable to me that the same date is applied for CGT purposes.
Crowdloans
Current tax rulings strike me as very unclear. My suggestions above, strike me as very clear and fair. If we are to accept this let us now consider some more complex scenarios involving crowdloans.
Valuing crowdloan rewards under the custody model
1) On 1/8/21 George buys KSM and on the same day lends KSM to a crowdloan for Token A. He is is allocated 1000 units of Token A. He custodies 300 units on 1/9/21 and another 50, over time, until 1/10/21. During this period token A has no market so George applies an income and cost basis of 0 to all 350 units. On 2/10/21 a market for token A opens; George applies market value to all coins claimed or earned hence.
2) On 1/8/21 George buys KSM and on the same day lends KSM to a crowdloan for Token A. This token already has a market. He is allocated 1000 units of Token A. He custodies 350 units on 10/10/21 and applies the daily market value to all 350 units. For tax purposes he continues to value coins according to whether custody involves automatic payment (such as staking) or manually claim (such as vesting).
Is crowdlending a taxable event?
3) On 19/5/21 George buys KSM for $600/unit. On 1/8/21 KSM is trading at $200/unit and George crowdloans to Token A. Because George is lending KSM this is not a swap event- therefore he does not record a capital loss to his KSM transaction (he also would not record a capital gain if KSM prices were reversed).
4) On 19/5/21 George buys KSM for $600/unit. On 1/8/21 KSM is trading at $200/unit and George crowdloans to Token A. George crowdloans his KSM via Bifrost and receives vsKSM in return; vsKSM is a tokenised claim to his underlying KSM. vsKSM can also be staked in DeFi to earn a yield. George must ask “will the ATO consider this a swap event?”
- if yes, then George must calculate a capital loss or gain to his KSM. In this case, George would be encouraged use crowdloans to actively farm tax losses without surrendering any of his underlying KSM.
- if yes, then 1 year later when George redeems his vsKSM for the underlying KSM, he will be forced to also deem this a swap event and calculate capital loss or gain a second time. Having multiple crowdloans active would lead to multiple ongoing swap events in and out of vsKSM; in this case even though George is clearly making long term investments in the kusama ecosystem he could be forced to declare himself a trader because of the frequency of his KSM-vsKSM swaps.
- if yes, and George would have a significant capital gain that exceeds any yield he might expect from vsKSM over the coming year then George is discouraged from a participatory mechanism which would earn taxable income. The effect would be a loss of income to both George and the ATO.
I believe it in the best interests of taxpayer and the ATO, to rule that a KSM crowdloan which returns a tokenised claim (vsKSM) for the underlying asset (KSM) is not a swap event. I also believe such a ruling would generate more economic activity and would do so in good faith.
5) George buys KSM at $20/unit and stakes it for 1.5 years. During this time he continuously sells all staking rewards as income while applying the Last in, First Out (LIFO) ruling. Now George wishes to make a 100 KSM crowdloan.
- If participating in a crowdloan is deemed a KSM swap event- and therefore taxable. George should buy and lend 100 KSM on the same day. With a LIFO ruling he protects his original tranche of KSM (bought at $20) from incurring a capital gain. This is important because his crowdloan might yield a token with no tradable value (or a locked token) and if he is unable to sell the crowdloan reward he would be left with an unserviceable tax debt.
- If George is forced to apply LIFO to staking rewards and FIFO to purchased tranches (which would make no sense) then he is better off giving his wife the money the buy and lend 100KSM on the day of the crowdloan. Then his wife can send him vsKSM in exchange. Because the KSM-vsKSM event was considered a swap then George can achieve the same KSM exposure by deeming vsKSM to be a different asset and thus avoiding an unfavourable tax treatment.
6) Lastly, consider the case of tokenised claims such as vsKSM. On 19/5/21 George buys KSM for $600/unit. On 1/8/21 KSM is trading at $200/unit. On the same day vsKSM is trading at $120/unit. If crowdloans are considered taxable events, what value should George apply? Does a generic crowdloan means George values his KSM sale at $200/unit? But if the crowdloan is a swap for vsKSM then he should value his sale at $120/unit. The difference is significant, and again would encourage George to harvest the maximum possible tax loss with no change to his underlying asset holdings.
In all of scenarios #3,4,5,6 I would argue the most reasonable answer is to not treat crowdloans as sale of the loaned asset- whether the route involve a full lockup or a tokenised claim. In both respects the locked asset or the tokenised claim should retain cost basis of the original underlying asset.
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