Do you know how to report rewards from rebase protocols like OlympusDAO?
If the answer is no, don’t worry. You’re certainly not alone.
Because rebase protocols are relatively new, many investors are confused about how to report rebase-related income.
In this article, we’ll explain the tax consequences of rebase earnings in simple terms. We’ll also highlight grey areas in the tax code and break down different approaches recommended by tax experts.
In the proceeding examples, we’ll use OlympusDAO and its OHM token to explain how rebasing works and how associated rewards are taxed. It’s important to remember that the same concepts apply to rebase protocols such as Invictus and WonderLand that leverage similar mechanisms.
What is rebasing?
Rebasing allows cryptocurrencies to increase or decrease their total supply across all holders.
Many stablecoins use rebasing to keep the price of their tokens pegged to a dollar. Whenever the price of the stablecoin starts to rise above one dollar, the protocol can increase the token supply to make sure that the value of an individual token stays at $1.
Meanwhile, protocols like OlympusDAO use rebasing to offer high APY to stakers. To better understand how this works, let’s take a closer look at OlympusDAO’s operations.
OlympusDAO explained
OlympusDAO is the protocol supporting the decentralized stablecoin OHM. However, unlike traditional stablecoins, OHM’s price is not pegged to the U.S. dollar. While OlympusDAO does hold backing assets in its treasury, the price of the OHM token fluctuates based on market forces.
Unlike other stablecoin providers, OlympusDAO does not let its treasury assets sit idly. Instead, these assets are staked in yield generating protocols, allowing OlympusDAO’s treasury to grow over time.
Meanwhile, OHM tokenholders are allowed to stake their tokens in exchange for sOHM (staked OHM). While sOHM cannot be transferred or traded on the open market, it can be used to claim an equivalent amount of OHM.
Every eight hours, OlympusDAO uses rebasing to adjust the supply of sOHM to match its treasury holdings. If OlympusDAO’s treasury grows in value, more OHM is created, and stakers are rewarded with additional sOHM.
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Investors can also acquire OHM through ‘bonding’. With bonding, traders can sell their crypto-assets to OlympusDAO in exchange for discounted OHM tokens. Recently, Olympus has released a service called Olympus Pro, which allows traders to use bonding to acquire other crypto-assets at a discounted price.
How are my rebase rewards taxed?
How should I report my taxes if I earned crypto through rebase rewards?
In the past, the IRS has said that staking rewards are classified as income. However, the IRS has not clarified whether sOHM counts as income at the time it is received or when it is claimed for OHM.
Because of this grey area in the tax code, some investors choose a conservative approach to reporting rebase rewards, while others opt for a more aggressive approach. The aggressive approach assumes that rebasing would be treated similarly to a traditional stock split, which is considered nontaxable.
Conservative approach: Report all of your sOHM as income based on the fair market value of your staking tokens at the time you received them.
Aggressive approach: Report income only when you transfer back your sOHM to OHM.
If you choose the conservative approach, it’s important to keep records of the amount of sOHM you receive over time. One method of accomplishing this is taking a snapshot of your sOHM at the beginning and end of each tax year.
How are the OHM tokens I’ve received through bonding taxed?
Crypto-to-crypto trades of any kind are considered taxable events. Trading your crypto-assets for OHM through bonding falls into the same category.
Typically, a crypto-to-crypto transfer requires you to incur capital gains or capital losses depending on how the price of the cryptocurrency you’re disposing of has fluctuated since you originally received it.
In addition, it’s unclear if the IRS will tax OHMs obtained through bonding similarly to income from traditional bonds. If bonding is taxed in a similar manner, the difference between the fair market value of your OHM and the price you paid through bonding should be considered income when you receive your OHM.
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How are Olympus Pro bonds taxed?
It’s possible that leveraging bonding through Olympus Pro in exchange for discounted crypto-assets may be taxed similarly to traditional bonds. Again, this would mean that the discount that you receive for your crypto-assets relative to the fair market value should be recognized as income at the time it is received.
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At this point, we recommend speaking with your tax professional if you have specific questions about how bonding should be reported on your tax return.
Simplify your crypto tax reporting today
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