With all the talk about crypto taxes on Leo Finance, I have been learning more and more about how to account for them. I had played around with DeFi on the Cronos blockchain. But, I had not committed. That is, until now.
The Bad News
The bad news is that when you wrap BTC, ETH, or any other coin, it is considered a trade. This is, at least, according to TokenTax.co. This means that all the CRO that I transferred from the Crypto.org chain to the Cronos chain, which is actually Wrapped CRO (WCRO), is considered a sale. That means, I'm on the hook for taxes.
The same is true for Wrapped ETH (WETH), Wrapped USDC (WUSDC), Wrapped BTC (WBTC), and Wrapped DAI (WDAI). I have all of these deposited in Tectonic.finance. This means I'll be in for a breathtaking tax bill. Fortunately, it's only half of my holdings. The other half will take my breath away next year.
Even More Bad News
As it turns out, when I deposit WCRO, WETH, WBTC, WUSDC, and WDAI into Tectonic, I get tWCRO, tWETH, tWBTC, tWUSDC, and tWDAI in exchange. So, that's 2 conversions so far. These, I'm hoping, will remain in Tectonic until my heirs collect it. They are of more value to me as loan collateral.
Maybe Not So Bad
Well, Tectonic also offers TONIC as a reward for depositing and for borrowing. So, I have decided to claim my TONIC rewards once per month, similar to my HP/HBD rewards. Then, when I claim the rewards, I convert immediately to USDC. Then, I use the USDC to pay back a loan. This ensures no capital gains on the TONIC as I've only held it for a couple of minutes. And, the USDC I got for the TONIC is my cost basis (roughly) and liquidation price. So, my TONIC rewards are ordinary income.
Other DeFI
Given my better understanding how to account for DeFi, I feel comfortable going back to VVS Finance for some liquidity mining.
So, I borrow USDC from Tectonic, convert half to the other pair, let's say VVS, to form the VVS - USDC pair. So, right there, I have a cost basis for the VVS. When you provide liquidity, you are exchanging VVS and USDC, in this case, for a VVS-USDC LP coin. So, that's a trade. But, since I have done it within minutes of the previous exchange, there's not much capital gains to worry about.
So, now that I have the VVS-USDC LP coin, it will earn VVS, which I will only claim once per month and immediately sell for USDC to pay the loan. Again, this ensures no capital gains. It is only ordinary income.
Key Takeaway
What I am figuring out here is that I will have capital that should not ever move. And, I will have capital that must move, and move quickly.
Given the nuisance of converting multiple coins to their wrapped version, I will be using USDC/WUSDC as my shuttle to and from Cronos. There is no advantage to wrapping coins individually. That just multiplies the number of transfer fees. Instead, I'll just buy USDC on Crypto.com and bridge that into Cronos. Once there, I can convert to anything else. Although, to be fair, I could just as easily use DAI or USDT. I'm just choosing USDC as it will make the accounting easier. And, more than likely, I will be using it to shuttle loans or loan payments. This is an advantage to stablecoins, your cost basis and sale price are easy to calculate.
This is just a quick post before I head home for the weekend. I wanted to write down the process I have in mind for 2022 taxes now that I am venturing into DeFi.
Posted Using LeoFinance Beta
Sorry for the late reply by I am assuming that Swap.Hive is taxable aswell due to it being a pegged token. Thank you so much for your insight, it's been extremely helpful reading your posts.
Yes. One can assume the same price as HIVE
Where it starts getting sketchy is the other tokens. They don’t all Have a historical price chart.
I agree with your post, and would also add that if there is no/limited price history for coin, then its probably not a coin worth investing in, as any coin that has any scrap of reputation will have its full history readily available. Also, it is not tracked on CoinMarketCap, it is a dead coin.