Detailed Instructions

Begin by compiling a complete list of all your DeFi interactions across multiple chains. This includes liquidity pools, staking contracts, lending platforms, and airdrops. You must track the specific smart contract addresses for each protocol, as this is where reward emissions originate. For example, a Uniswap V3 LP position on Ethereum will have a unique NFT contract address representing your stake.

• Sub-step 1: Export Transaction History: Use blockchain explorers (Etherscan, Arbiscan) or portfolio trackers (Zapper, DeBank) to export CSV files of all transactions for your wallet addresses.
• Sub-step 2: Categorize Protocols: Manually or with a tool, tag transactions by protocol (e.g., Aave, Curve, Lido) and action type (e.g., Deposit, Claim, Withdraw).
• Sub-step 3: List Reward Tokens: Create a master list of all reward tokens received, such as UNI, CRV, or AAVE, and their respective contract addresses (e.g., 0x1f9840a85d5aF5bf1D1762F925BDADdC4201F984 for UNI).

Tip: For complex histories, consider using an API from a service like Covalent (GET /v1/{chain_id}/address/{address}/transactions_v2/) to programmatically fetch all data.

Detailed Instructions

Taxable income is calculated based on the Fair Market Value (FMV) of rewards at the time you gain constructive receipt—typically when they are claimable or automatically deposited into your wallet. This requires knowing the exact block timestamp of the reward transaction and the token's price at that moment.

• Sub-step 1: Isolate Reward Transactions: Filter your transaction history for specific events like Transfer or Claim where tokens are sent to your address from a known reward contract.
• Sub-step 2: Query Historical Price Data: Use the block number from the transaction to pull the historical USD price. You can use a decentralized oracle's historical data or an API like CoinGecko's /coins/{id}/history endpoint.
• Sub-step 3: Perform the Calculation: Multiply the quantity of tokens received by the FMV. For example, if you claimed 10 CRV at block #18234567 where 1 CRV = $0.85, your taxable income is $8.50.

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// Example calculation for a single reward event
const rewardAmount = 10; // CRV tokens
const fmvPerToken = 0.85; // USD at time of receipt
const taxableIncome = rewardAmount * fmvPerToken; // $8.50

Tip: For rewards accrued continuously (like staking rewards), the IRS may consider them income daily. Use a tax platform that supports daily accrual accounting.

Detailed Instructions

Once you have recorded the reward as income, the FMV at receipt becomes your cost basis. When you later dispose of the token (e.g., sell for USDC), you will incur a capital gain or loss based on the difference between the disposal price and this established cost basis. Accurate tracking is critical for calculating this second tax event.

• Sub-step 1: Implement FIFO Accounting: By default, the First-In-First-Out (FIFO) method is used. The first reward tokens you received are considered the first ones sold. Maintain a ledger that tracks separate "lots" for each reward event.
• Sub-step 2: Record Disposal Events: Log every swap, sale, or use of the reward token. Note the date, amount sold, and the USD proceeds from the sale.
• Sub-step 3: Calculate Gain/Loss: For a sale, subtract the cost basis of the specific lot from the sale proceeds. For example, selling 5 of the 10 CRV (from Step 2) for $5.00 total when their cost basis was $4.25 (5 * $0.85) results in a capital gain of $0.75.

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// Example capital gain calculation
const tokensSold = 5;
const costBasisPerToken = 0.85; // USD (FMV at receipt)
const totalCostBasis = tokensSold * costBasisPerToken; // $4.25
const saleProceeds = 5.00; // USD from selling the 5 tokens
const capitalGain = saleProceeds - totalCostBasis; // $0.75

Tip: Consider using specific identification (SpecID) if your tax software supports it, allowing you to select which lot to sell to optimize tax outcomes.

Detailed Instructions

The final step is translating your on-chain data into official tax forms. Ordinary Income from rewards is reported on Schedule 1 (Form 1040), Line 8z as "Other income." Capital gains and losses from disposing of those rewards are detailed on Form 8949 and summarized on Schedule D. Each transaction requires a description, date acquired, date sold, proceeds, cost basis, and gain/loss.

• Sub-step 1: Create Income Summary: Sum all FMV calculations from Step 2 for each tax year. This total is your "Other income" from DeFi rewards.
• Sub-step 2: Prepare Form 8949 Data: For each disposal event, create a row with:
  • Description: "Sale of 5 CRV tokens"
  • Date Acquired: The timestamp from Step 2.
  • Date Sold: The timestamp of the sale transaction.
  • Proceeds: Sale amount in USD.
  • Cost Basis: As calculated in Step 3.
• Sub-step 3: Reconcile with 1099s: If you used a centralized exchange (CEX) like Coinbase, ensure the totals from your self-calculated Form 8949 match any 1099-B you receive, adjusting for any discrepancies.

Tip: Use a crypto-specific tax software (e.g., Koinly, TokenTax) that can automate the generation of Form 8949 and Schedule D CSV files directly from your wallet addresses and API connections.

Detailed Instructions

Income aggregation is the critical first step. You must collect data from every DeFi protocol, blockchain, and centralized exchange where you earned rewards. This includes yield farming, liquidity provider (LP) fees, staking rewards, and airdrops. Treat each blockchain as a separate ledger.

• Sub-step 1: Export Transaction Histories: Log into each platform (e.g., Aave, Uniswap, Lido) and export CSV files of your transaction history for the tax year. For on-chain activity, use a block explorer like Etherscan for Ethereum or Solscan for Solana with your public wallet address (e.g., 0x742d35Cc6634C0532925a3b844Bc9e...).
• Sub-step 2: Use Portfolio Trackers: Import your wallet addresses into a dedicated crypto tax software like Koinly or CoinTracker. These tools automatically pull and categorize transactions from supported protocols.
• Sub-step 3: Document Manual Rewards: For unsupported or new protocols, manually record the date, asset, amount, and USD fair market value at the time of receipt in a spreadsheet.

Tip: The IRS and many other tax authorities consider crypto rewards as ordinary income at the time you gain control over them, regardless of whether you've sold them.

Detailed Instructions

Cost basis establishment requires pinpointing the exact USD value of your rewards when they were received. This value becomes your income amount and the cost basis for the asset if you later sell it. The timing is crucial, as crypto prices are highly volatile.

• Sub-step 1: Find the Precise Timestamp: Use your transaction hash or block number from the explorer to find the exact time the reward transaction was confirmed on the blockchain.
• Sub-step 2: Source a Historical Price: Use a reliable API or historical price database to find the asset's price at that timestamp. For example, you can query CoinGecko's API: https://api.coingecko.com/api/v3/coins/ethereum/history?date=01-01-2024.
• Sub-step 3: Calculate USD Value: Multiply the quantity of the reward token by its USD price at receipt. For a reward of 0.5 ETH received when ETH was $2,500, your taxable income is 0.5 * 2500 = $1,250.

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// Example calculation for a reward
reward_amount = 1.75
price_at_receipt = 3200 // USD per token
taxable_income = reward_amount * price_at_receipt // = $5,600

Tip: Consistently use the same reputable price source (like CoinGecko or CoinMarketCap) for all your valuations to maintain audit trail consistency.

Detailed Instructions

Tax classification varies by jurisdiction and the nature of the reward. Misclassification can lead to incorrect reporting. In the U.S., most DeFi rewards are treated as ordinary income, but nuances exist.

• Sub-step 1: Standard Staking/Farming Rewards: Rewards for validating (staking) or providing liquidity (farming) are typically ordinary income. Report the fair market value from Step 2 on Schedule 1 (Form 1040) as "Other Income."
• Sub-step 2: Liquidity Provider (LP) Fees: Fees earned from pools (e.g., 0.3% fee on a Uniswap V2 ETH/USDC pool) are also ordinary income, accrued continuously. You may need to use a tool that calculates daily accruals.
• Sub-step 3: Airdrops and Hard Forks: General airdrops you receive without providing a service are typically taxable upon receipt. However, if you must perform a task to claim them, they are income at the time of claim.
• Sub-step 4: Check Local Rules: Some countries may have specific rules; for example, Portugal may treat them as tax-free, while Germany has a holding period rule.

Tip: The IRS's 2019 guidance (Rev. Rul. 2019-24) specifically addresses hard forks and airdrops, stating they are taxable upon receipt if you have dominion and control.

Detailed Instructions

Final calculation and reporting consolidates your work. You will sum the USD value of all rewards classified as income, potentially subtract any allowable expenses (like gas fees directly related to earning that income), and report the net figure.

• Sub-step 1: Summation: Add the USD value from every reward event identified in Steps 1 & 2. Use spreadsheet software or your crypto tax platform to generate a total for the year.
• Sub-step 2: Account for Expenses: In some jurisdictions, you can deduct directly related expenses. For example, if you paid $50 in Ethereum gas fees to claim a farming reward worth $500, your net income may be $450. Keep meticulous records of these transaction hashes.
• Sub-step 3: Integration into Tax Return: In the U.S., report the total on Form 1040, Schedule 1, Part I, Line 8z as "Virtual Currency Earnings." Attach a statement if required. Use Form 8949 and Schedule D later if you sell the rewarded assets.
• Sub-step 4: Documentation: Prepare a summary report listing each major reward event (Date, Asset, Quantity, USD Value, Transaction ID) to support your filing.

Tip: If using software like TurboTax, ensure your crypto tax platform can generate a report compatible with its import function (e.g., a .tax file) to streamline the process.