In the Settings, you can modify the behavior of most "income-like" tags (Reward, Airdrop, Fork, Mining) by deciding if you want to treat deposits with such tags as income or not.
This article explains what changes in your tax reports depending if the toggle is ON or OFF.
These toggles act the same way for all four tags: Reward, Airdrop, Fork, Mining so below we discuss the behavior on one example - the Reward tag.
☝️ Which option to choose?
Treatment of rewards (mining, airdrops, etc.) depends on your country's tax regulations. You can check our tax guides but, if in doubt, consult it with your tax advisor.
"Treat rewards as income" is ON
The worth (fair market value) of the deposited asset is added to the Income total of the year
The cost basis (cost of acquisition) of the deposited asset is assigned as its worth
If you later sell the asset received as reward, the gain will be calculated according to its market value at the time and the cost basis assigned
When the toggle is ON, you can think of your rewards as "I earned z USD and immediately bought crypto with it"
🔵 Example: Receiving and selling ATOM rewards
In June 2023, you claimed your ATOM staking rewards: 3.50 ATOM
Two months later you decided to transfer them to Coinbase to sell them
Tokens are worth less than when you received then, so the trade resulted in a loss
If you check your Tax Summary, you now have:
Capital gains: -$4.40 (loss)
Income: $37.82 (value of rewards on the day of receipt)
"Treat rewards as income" is OFF
Fair market value of the asset on the day of the deposit is ignored
No income is added to the yearly total
Cost basis of the asset is set as $0.00
If you later sell the asset received as reward, the gain will be calculated according to its market value at the time and the cost basis - but since cost basis is $0.00, the whole market value will be considered your capital gain
When this toggle is OFF, you can think of your rewards as "free money" - assets you received without paying anything
🔵 Example: Receiving and selling ATOM rewards
In June 2023, you claimed your ATOM staking rewards: 3.50 ATOM
Two months later you decided to transfer them to Coinbase to sell them
Selling the tokens result in full capital gains equal to the value of the tokens on this day, since the cost basis is $0.00
If you look at your Tax Summary, you now have:
Capital gains: $33.42 (gain)
Income: $0.00 (you don't consider rewards as income so this is $0.00)
Will I be double-taxed if I have this toggle ON?
There is no double taxation in neither of the options:
If the toggle is ON, you receive income immediately but your capital gains will be lower when you eventually sell the asset
If the toggle is OFF, you don't report any income but your capital gains are larger when you decide to sell the asset
Having the toggle OFF is beneficial if the asset depreciates in value (as you sell it for less than the income you are taxed on).