Intro
Why keep a separate record of all your transactions when the information is already stored on the blockchain and easily accessible?
This tool is using the TzKT API by the Baking-Bad team to read your address transaction history from the blockchain information and pair it to the fair market value of Tezos at the time of the transaction.
As you probably know, under US tax law cryptocurrency is treated like property. This concept initially confuses a lot of people, and if you are one of them you are not alone.
Taxes TL;DR
In the section Detailed Tax Explaination, there is a detailed description of US tax law as it relates to the taxation of cryptocurrency in general, but here is the TL;DR:
Though I am biased, I think everyone should read the long description too.
Each time you receive crypto, whether buying or a staking reward, it has a tax basis based on market price at the time you buy it or receive it. Each transaction or reward is actually a separate and discreate piece of property from your total account value. Because each transaction is separate property, and the parket price may go up or down, each transaction must be accounted for separately at any later sale. To comply with, and benefit from US tax laws it is helpful to think of each transaction as individual units of property, rather than your whole address value as one unit of property.
If you do not account for your crypto transactions this way, the standard is called "First in, First Out", or the oldest transactions are considered to be sold first. The benefit by tracking transactions this way is that you can precisely choose which individual portion of your entire holding you are selling, allowing for advanced strategies like loss harvesting. This is done by using the transaction's timestamp as part of the property description on IRS Form 8949.
When is Cryptocurrency Taxed?
When you recive staking rewards = taxable as income at the time you receive it
When you recive a split crypto from a hard fork = taxable as income at the time you receive it
When you exchange one crypto for another crypto = taxable as property and follows capital asset rules (like stocks)
When you sell any crypto for cash = taxable as property and follows capital asset rules (like stocks)
When you buy crypto from an exchange = not taxable because you just paid for it. However, this price creates your basis for future sales or exchanges.
When you transfer crypto from one wallet that you own to another wallet that you own = not taxable
When you recive any crypto as a gift = not taxable if it is really a gift
How to Use this tool
The proof of stake reward system has many positive features, but the biggest down side is that it is effecient from a US tax perspective.
Back to Basis can help you manage your staking rewards and the tax consequences that come with them, and as it grows, hopefully the tool will become part of your financial tool belt. While the tool is small now, by the time ETH 2.0 goes mainstream it will have grown to be a significant tax analysis tool.
Who will Benefit from this tool?
This tool is designed for anyone who is staking their crypto from a personal wallet. In order to use the tool, you will need to know your wallet's public address. If you are staking from an exchange wallet, this tool will probably not help you.
Filter by Year Tool
This selection on the main page filters your transactions by the year that they happened. Because this is a tax tool, we want to look at an entire year for accurate tax reporting. In the future there will be functionality to view transactions between two dates.
The Exclude Tool
Exclude cannot be undone. If you exclude the wrong items you will have to start over.
The tool does a lot of the heavy lifting for you, but some things still need a human's touch. When looking through the returned information, you will need to select the transactions that are not taxable events and remove them because we do not want those to be part of the calculations. This is because only YOU are able to know if a transaction sent to your address is a taxable event. Some transactions are not taxable events, depending on how you got them. For instance, simply sending crypto from one address that you own, to another address that you also own, is not a taxable event. But lets say you buy crypto on an exchange and then immediately send it to your private wallet, the cost basis that the tool shows for that transaction is going to be pretty accurate. See When is it Taxable? for more info.
A single row or multiple rows may be excluded at a time. The tool can be used as many times as needed to find all of your non-taxed transaction. After the transactions are excluded, the tool will calculate the staking reward income to this address based on the remaining information.
The Sell Tool
The sell tool works independently of the exclude tool and will show you your estimated profit or loss if the selected items were sold at the current market price. This tool is the backbone of how you can use the classification of cryptocurrency as property to your advantage. Select any of the transactions and click the sell button (this will not actually sell your cryptocurrency; the tool does not have access to your private key). Because cryptocurrency is classified as property, each small portion you recive through a purchase or a staking reward is a separate piece of property, with a separate basis. This means each piece must be calculated separately to find your true profit or loss.
If you were to do the calcuation per row or item by hand it would look like this: (Amount Recived * Market Value) - (Amount Received * Cost) = Proit/Loss. Next, when you add up all of the Profit or Loss from all of the items, you can find your net profit or loss.
Note: this tool does not show you the full return of a sale, only the profit or loss from the sale
Liquidation Return
This tool is recalculated as you remove information from the table. It gives an estimate of your return (profit or loss) if you were to sell all of the crypto related to any transactions shown in the table, i.e. liquidate the address.
Export to PDF, Excel, or CSV
The export functionality is thanks to datatables.net. This allows you to save your work to your computer after you have analyzed your address. If there are rows selected, only the selected rows will be exported. If there are no rows selected, the entire table will be exported.
Limitations on this tool
The only real limitation is that any profit or loss on transactions that result in a return that is less than $0.01 (i.e. $0.009 or lower) will be displayed as $0.00. The tool is computing currency by a plugin called currency.js and is not simply cutting the value short simply by removing excess decimals. If any transaction resulted in something higher it will be displayed. The IRS does not care about less than a penny, but whole dollars are important.
A Detailed Analysis of the Tax Principals Behind this tool
Under general tax principals, when you buy any property, the amount you paid for the property is called its "basis", and the tax basis can be adjusted up or down depending on any costs associated with that purchase.
This idea applies whether you buy a house, or buy stocks, or buy cryptocurrency. When you sell the property later, you subtract the basis from the amount you received on the sale to figure out any profit or loss. The catch is that you can only claim the losses from property you were holding as an investment. Most people are holding crypto as an investment anyway, so for this tool we will assume that is the case.
When you buy cryptocurrency, the basis is easy to find; it is simply whatever you paid for it. Whatever quantity of crypto you bought becomes a single unit of property for tax purposes, and because you paid for it, there are no other tax implications until you exchange it for another crypto or sell it later, but if you buy more crypto later, you cannot just keep adding to that original basis. Each purchase is a discreate transaction that creates a separate unit of property.
Accurate cryptocurrency accounting should follow the same principals. The big challenge comes when you are receiving staking rewards because the above situation is amplified, and the characterization of crypto as property makes for a very inefficient tax situation.
Each staking reward that is paid to you is considered taxable income. The amount of income to you is the market value of the quantity of you receive, at the market price at the time you receive it. With Tezos block rewards paying every three days (and ETH 2.0 paying every 6 minutes), you can see how this situation can grow out of hand very quickly.
While anyone with a modest holding will likely not receive a significant amount of income from the staking rewards, early adopters, or those who are running block validation nodes may end up with a few hundred dollars (or more) worth of new crypto after each cycle.
Under Tezos its not as difficult to track each reward over the course of a year. 365 ÷ 3 = ~122 potential rewards for the year. But ETH 2.0 and other faster block cycles will quickly become burdensome to account for. 525,600 minutes in a year ÷ 6-minute cycles means the potential for 87,600 block reward transactions per delegation contract generated in a single year!
The benefit of keeping track of all your rewards as separate instances of property is that you can precisely choose which individual portion of your entire holding you will exchange or sell, allowing for advanced strategies like loss harvesting. This can done by using the transaction's timestamp as part of the property description on IRS Form 8949.
About the Author
At the time this website was launched, December 2020, I am a grad student working towards a LL.M in the Laws of Taxation (basically an advanced law degree). I passed the Florida bar exam in 2020 and started this project to avoid studying for my fall semester exams. I am a hobbyist web developer at best, and this is by far the most complex project I have ever undertaken. I hope it grows into something meaningful for both the crypto and tax community. My contact info is at the top of the pages, feel free to reach out if you have any questions, or want to contribute.