Uniswap is a popular decentralized cryptocurrency exchange which has gained a lot of popularity in the past few months. On September 16th 2020, it distributed a governance token called, UNI, to reward early adopters of the platform. So far, over 150,000 addresses have claimed UNI tokens.
UNI Tokens Are Taxable As Ordinary Income
Per the Rev. Rul. 2019-24, tokens received as a form of a reward is taxable at the time you gain dominion of control. In simple terms, this means at the time you claim it. This is an important factor to know because many users had to wait for an extended period of time to claim their tokens due to the congested ethereum network. During this time, the token issued at the initial minted price appreciated in value due to market supply and demand. Going with the doctrine of dominion of control, you have to report ordinary income based on the value at the time you get full control over (ability to send and sell) the tokens.
Suppose you received 400 UNI tokens. At the time you claimed them, a token was worth $5. In this case, you would report $2,000 ($5 * 400) as ordinary income on your taxes. This would be reported on Schedule 1 as Other Income. Once you report this income, $2,000 becomes the cost basis of the 400 UNI tokens you have. If you were to sell them when the price goes up to $8/coin, that would trigger a capital gain of $1,200 (400 * ($8 – $5) ).
Gas Fees Have Tax Benefits
We also saw skyrocketing gas fees associated with claiming UNI tokens and the ethereum network in general. Luckly, these gas fees have some tax advantages.
Gas fees on sales and dispositions are deducted from proceeds. For example, if you sell 1 ether (ETH) for $100 and spend $5 for gas, your total proceeds on the transaction would be $95 ($100 – $5).
Gas fees on transfers could be added back to the basis of the token. Suppose you purchase 1 ETH at $10 on Coinbase. In order to transfer this token to Metamask, you incur a $2 gas fee. Once the transfer is complete, the cost basis of your 1 ETH on Metamask will be $12 ($10 + $2). When the cost basis increases, the eventual capital gains will decrease.
Considering the IRS’s recent crypto tax compliance initiatives (moving the crypto question to Form 1040 and sending out crypto tax warning letters) and based on Rev. Rul. 2019-24 issued to specifically address crypto airdrops, income received from UNI and other DeFi tokens is not something you should avoid reporting.
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.