Living in America? Don’t Forget to Leave Some UNI Tokens for the IRS

Uniswap brought Christmas early this year, as the decentralized exchange (DEX) announced the UNI token airdrop to all of its liquidity providers (LPs).  

Nevertheless, before spending it all, don’t forget to leave a slice for the IRS.

Capital Gain Tax or Income Tax?

Gains on cryptocurrencies entail a capital gain tax because digital assets are seen as property. However, mechanisms in DeFi have brought a change to that. 

While crypto investors incur capital gain and loss taxes from the appreciation in the price of the cryptocurrencies held, direct earnings in DeFi are recognized as income and taxed as such.

Let’s take the example of Uniswap. Fees earned on Uniswap is the same as rent or interest income for individuals. If an LP earns $100 in fees, these earnings will be counted as regular income of $100. It does not matter at what price the digital asset is sold in the future. 

This applies to all yield farming earnings.

Hence, UNI tokens distributed yesterday must be accounted for as income per their market value when they were claimed. 

Income Tax on UNI Token Distribution

Out of one billion tokens, 15% of UNI was distributed to liquidity providers, users, and SOCKS redeemers/holders. 

At $3 a token, Uniswap’s airdrop comes out to $450 million worth of free money for users. At an average income tax rate of 24%, the IRS would make $108 million if every recipient were based in the United States, which is not the case.

In the U.S., the percentage of income tax is calculated based on the total income of an individual, and varied rates apply beginning from 10% to 37%. The fiat amount of the tokens claimed from the DEX will determine the tax on the earned income. 

For instance, an individual earning roughly $50,000 per year falls in the 22% category, according to American tax laws. Users are thus required to keep aside at least $200 to $300 (depending on the price of UNI at the time it is claimed) for the IRS. 

Moreover, while 400 UNI tokens were distributed to all the users that ever used the DEX, liquidity providers and SOCKS redeemers/holders earned even more. 

Of the total 150 million UNI  tokens, about 49 million were distributed to LPs and SOCKS users depending on the liquidity amount and time for which liquidity was held on Uniswap pools before Sept. 1, 2020.

Instead of selling, if users hold their tokens in anticipation of future market gains, the IRS will account for those as capital gains or losses tax. It will be calculated from the price of UNI at the time of spending/selling subtracted from the price it was claimed for free.