Page 72 - BusinessWest February 21, 2022

well as the potential tax implications, might scare off some investors, but with a $114 billion market cap in 2022, there are plenty more who are ready to enter the DeFi space.
How Complicated Can It Get?
With the DeFi foundation laid,
let’s color the conversation through a real-life example with some surpris- ing complexities. When exploring the world of DeFi, it is unlikely you’ll ven- ture far without hearing about Olym- pusDAO. What is OlympusDAO? It is a decentralized reserve currency proto-
col based on the OHM token. Hopefully, this example will illus- trate just how quickly crypto can get
complicated.
Participants seek returns through
staking and bonding strategies. ‘Stak- ers’ stake their OHM tokens into a pool with other like-minded individu- als. Those OHM tokens are then put
to work on the blockchain and earn rewards in the form of more OHM. Alternatively, those choosing to engage in the bonding strategy provide liquid- ity in the form of other crypto assets or DAI tokens to the Olympus Treasury. These assets are the necessary backing for new OHM minted and help to pro-
vide stability to the value of OHM. To compensate the participants for bond- ing, the protocol makes OHM available for purchase at a discount after a vest- ing period.
Now suppose the staking option sounds appetizing. You open your account, you ensure you have suffi- cient funds, and you navigate to a cen- tralized exchange in search of OHM. Oh no ... OHM is not currently traded on a centralized exchange. So what do you do? You take a deep breath and turn to Google.
Quickly, you will recognize that OHM can only be purchased through a decentralized exchange (DEX) and
you need the appropriate cryptocur- rency, Ethereum (ETH), to participate. You purchase ETH on the centralized exchange for USD, which is a non- taxable event. With the ETH in hand (in your crypto wallet), you navigate to a DEX such as SushiSwap and exchange ETH for OHM. This exchange is a capital event, and gain/loss should be calculated. The cost basis of the newly acquired OHM should consider this gain or loss. OHM can now be staked on OlympusDAO in exchange for sOHM (‘staked’ OHM).
When OHM becomes sOHM, there is an argument to say this is a property exchange and taxable again as capi-
tal gain/loss. The sOHM earns more sOHM over time, which is ordinary income upon receipt. Eventually, you might decide to cash out your sOHM. When sOHM is exchanged back to OHM, a taxable exchange has occurred again. Finally, you convert your new pool of OHM back to ETH, which, as you likely guessed, is taxable as capital gain/loss.
While this example is considered fairly simple and common, this jour- ney alone noted five different taxable
“While some trends at the beginning of the pandemic, such as whipped coffee
and banana bread, seemed to dim their lights, the cryptocurrency market is continuing to blaze new trails.”
events. Keep in mind the software currently available often struggles to appropriately track the tax basis of your crypto property and ordinary income received through each of the steps. Furthermore, trading fees can be challenging to track. When prepar- ing for the 2021 filing season, consider reaching out to a qualified CPA.
Now What?
The landscape of cryptocurrency and digital assets is evolving daily. The variety of investment options contin- ues to expand, as does the number of investors. As you consider joining the cryptocurrency marketplace, there are a few things to keep in mind.
First and foremost, investors should consider investing in cryptocurrency- tracking software. Subscriptions vary in price and quality. Providers are rac- ing to improve their systems and close the reporting gaps for DeFi, NFTs, and play-to-earn. Staying apprised of new developments in this space is key for
Crypto
Continued on page 82
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