Uniswap is a decentralized cryptocurrency exchange which has recently gained popularity. On September 16, 2020, Uniswap rewarded early adopters of the platform with a governance token called (UNI). Over 150,000 addresses have claimed UNI tokens, worth hundreds of millions of dollars.
UNI airdrops are taxed as ordinary income
Per IRS rules impacting DeFi taxes, tokens received are rewards that are taxable at the time you gain control. This is based on the T Going with the doctrine of dominion of control, which explains that, 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.
In simple terms, you pay ordinary income on the fair market value at the time you claim the airdrop. This is important, because many users had to wait for an extended period of time to claim their tokens due to congestion on the Ethereum network. During this time, UNI significantly appreciated in value due to market supply and demand.
Suppose you received 400 UNI tokens. At the time you claimed them, UNI was worth $5 per token. 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, the $2,000 becomes the cost basis of the 400 UNI tokens until a future disposal of them. If you were to sell them when the price goes up to $8 per token, that would trigger a capital gain of $1,200 (400 * ($8 – $5) ).
Gas fees have tax benefits
During the UNI airdrop frenzy, Ethereum network gas fees skyrocketed. Luckily, the savvy investor can take advantage of the high gas fees on their taxes.
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 which was issued specifically to 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.