The taxpayer, a resident individual, deposited two types of crypto-assets (the “Deposited Tokens”) into liquidity pools in a crypto pooling vehicle (the “Platform”), in exchange for two classes of “Receipt Tokens” (aka “RTokens”), which evidenced such deposits and could themselves be transferred, or used to claim corresponding underlying deposited assets.
The taxpayer subsequently redeemed the Receipt Tokens for crypto-assets of the same type as the Deposited Tokens, at a time that they had appreciated in value. In the meantime, the taxpayer received a return from the Platform (the “Rewards”) in the form of “Nativetoken,” which also could be realized upon by exchanging them through decentralized exchanges for other crypto assets. These Nativetoken rewards accrued to the taxpayer daily based on his proportion of the “underlying” tokens staked in each of the two pools.
The Directorate found that if the tokens were held in a business on income account:
[A] deposit of the Deposited Tokens, redemption of the Receipt Tokens, and sale of the Receipt Tokens for goods constitute barter transactions in accordance with … IT-490. As such, the taxpayer should recognize income in the year in which each such transaction took place.
Similarly, if the taxpayer sold the Receipt Tokens in exchange for money, the realization principle should typically apply such that the transaction is a taxable event … .
The Rewards would be included in computing the taxpayer’s income under s. 9.