We recently caught up with Abhinav R. Soomaney, Founder and CEO at CryptoTax Pvt. Ltd. He talked about different tax aspects of cryptocurrency and blockchain-related investments.
CryptoTax Pvt. Ltd. (CryptoTax) was incorporated in the year 2021 and claims to be the first cryptocurrency tax consultancy firm in India that specializes in crypto-taxes and focuses only on providing services in this niche field. CryptoTax assists clients from several geographic locations including the Unites States of America, Unites Arab Emirates, Australia, and India.
Soomaney has around 5 years of experience in this field and claims to have worked with numerous clients from all over the world. Soomaney also works with a California-based CPA firm, Neumeister & Associates, LLP, as the Cryptocurrency & Blockchain tax expert.
Our discussion with Abhinav R. Soomaney is shared below.
Crowdfund Insider: What is considered a taxable event in the world of cryptocurrency trading?
Abhinav R. Soomaney: This is the most important and fundamental concept that anyone trading in cryptocurrency should know. A taxable transaction occurs every time a person sells a coin or trades one coin for another. The following is a brief on the different types of taxable transactions along with their tax implications:
• Airdrops: 100% taxable and considered as ordinary income.
• Hard forks: 100% taxable and to be considered as ordinary income.
• Sell any coin like ETH: Sales proceeds earned by selling the coin must be deducted by the cost basis to calculate the capital gain/loss incurred.
• Trade one coin for another: Sell BTC to buy ETH (BTC/ETH). In this particular example, selling BTC is considered a taxable event irrespective of the fact that the same is not getting traded for cash.
• Transferring coins from one wallet to another is not a taxable event unless you are sending coins to make a payment to someone else in exchange of goods or services.
Crowdfund Insider: How are NFTs taxed for traditional investors and for artists & creators?
Abhinav R. Soomaney: NFT tax implications for traditional traders is very straightforward. The cost basis of a particular NFT must be recorded and applied against the sale of that NFT itself. NFT taxes are based on serial numbers and name categories.
For example, Mr. A purchased an NFT for 0.5 ETH and sold it after 2 months for 0.7 ETH. The revenue earned will be 0.2 ETH and should be recognized as ordinary income. However, the investors must also keep track of the purchase price for that O.5 ETH spent to purchase that NFT because that will be considered a taxable transaction. ETH coins were sold or paid to someone and traded in exchange of an NFT which makes it a taxable event.
Taxes for NFT creators and artists is a little more detailed.
There are multiple sources of income here which include but are not limited to the sale of NFT and royalty income generated from all sale orders related to NFTs created by the artist. NFT income can be treated as a business, so expenses incurred in creating that digital art like software, office space, utilities, salaries, transaction fees paid can be written off against the sales revenue which allows artists to pay taxes on the net income and not gross revenue.
Crowdfund Insider: How do you determine a taxable transaction for DeFi investments like yield farming and token swaps?
Abhinav R. Soomaney: Investor’s demand for DeFi investments has seen tremendous growth in the past couple of years. However, the tax calculation for such investing is still a grey area.
The following is a brief on types of Defi transactions and their tax implications:
• Defi yield farming and its tax implications: When you contribute to a liquidity pool on a Defi platform, a liquidity pool token is rewarded in exchange of that contribution.
Then, when the investor returns these LP tokens back to the platform, there is a bonus token allocation in addition to the principal amount invested or contributed by the investor. The interest or additional tokens received upon claim is considered as the 100% taxable ordinary income.
• Token swaps: This refers to simple coin to coin trades. These are taxable events and capital gain/loss must be calculated on such transactions based on the cost basis of the base token that is being swapped.
• DeFi loans: This is a feature allowing lenders/borrowers to address demand/supply for a particular token at a fixed APR. For example, Mr. A lends 5 ETH coins using the Defi Peer-to-Peer feature at an interest rate of 25% APR with a fixed tenure of 6 months. Here, the additional coins that Mr. A will receive upon redemption will be taxable and not the 5 ETH that were lent.
Crowdfund Insider: Do you recommend any specific tools that can be easily accessed to help better deal with crypto taxes?
Abhinav R. Soomaney: Cryptocurrency tax calculations can sometimes be very complex and securing data of certain exchanges or off-chain wallets might be a hassle. My recommendation for wallet transactions especially with Defi investments is Zerion. It is a powerful tool backed by a Canadian company, Covalent. Zerion uses powerful API keys to integrate all off-chain wallets and help investors get their transaction data within a few seconds.
Another interesting tool for NFT traders is NFT bank. This allows live tracking for all NFT trades with the help of serial numbers or name categories. Reports generated using these two software tools can be handed over to a trusted crypto-tax advisor for accurate computations.
Crowdfund Insider: How are cryptocurrency gifts taxed?
Abhinav R. Soomaney: Cryptocurrency gifts are taxed differently depending upon the person’s geographic location. Ideally, these should be taxed for the receiver only when coins received are sold. The cost basis or purchase price paid by the donor should be transferred on to the receiver and applied by the receiver as and when those coins are sold.
Hence, it is very crucial for both parties to keep track of the cost basis and relevant evidence of the same. However, a few countries might consider gifts to be taxed as and when they are received by the receiver by categorizing it at ordinary income. In such cases, the cost basis would be the spot price of that token multiplied by the quantity of coins received.
Crowdfund Insider: What are the different tax calculation methods available to investors for their tax computations?
Abhinav R. Soomaney:
• First-in-first-out (FIFO): First-in-first-out is a method of calculation for the client’s crypto taxes wherein it is assumed that the oldest coins in a client’s portfolio must be sold first. The costs paid for those oldest coins are the ones used in the calculation.
• Last-in-first-out (LIFO): Last-in-first-out is a method of calculation for the client’s crypto taxes wherein it is assumed that the most recent coins added to a portfolio have to be sold first.
• Highest-in-first-out (HIFO): Highest in first out is a method of calculation for the client’s crypto taxes wherein the highest cost coins are the first to be taken out of inventory pools. HIFO based inventory calculations help clients decrease their taxable gains since it will realize the highest cost of coins sold. Selecting the right calculation method is a very crucial step for every investor because this can help reduce taxable gains/losses drastically. It is like inventory management, however, transferring coins from one platform to the other makes it difficult for investors to keep a track of the original cost basis of every coin pool.
Crowdfund Insider: Please explain the tax structure for cryptocurrency mining.
Abhinav R. Soomaney: Cryptocurrency mining can be considered a business operation. To mine cryptocurrency, there are several expenses incurred in the process including but not limited to the purchase of the mining rig/machine, graphic cards, storage facility, cooling or other utility costs, routine maintenance costs etc.
In fact, when a miner purchases a rig and mines cryptocurrency under a company (by incorporating a crypto mining entity), he/she can depreciate that expense as an asset purchase and claim it against the total income earned in the form of coins during the first few years from incorporation based on the estimated asset life as per accounting standards.
In the case of crypto mining, the miner decides to hold the coins after mining them, then there is a capital gain/loss calculation done based on the spot rate of coins, as and when they were mined and sold.