What Is a 'coin swap'?
A coin swap, also known as a token swap, is a process required when a significant change is made to a cryptocurrency's underlying technology, necessitating the exchange of old tokens for new ones. This is different from a typical crypto-to-crypto trade as it involves replacing a deprecated token with a new version rather than simply trading between different currencies.
Examples of coin swaps:
- LEND was swapped for AAVE.
- BNB transitioned from an ERC-20 token to its own native Binance Coin.
- ANS was swapped for NEO.
This process can also be used for token mergers.
Accounting for Coin Swaps
Is a coin swap a taxable event?
In the case of a coin swap where the original blockchain is completely abandoned and all assets are transferred to a new blockchain, this event is not considered taxable. The reason behind this is that the swap is treated as a continuation of the original investment rather than a disposal or realization event which would trigger a capital gains tax.
How to determine the cost basis and holding period?
For tax purposes, the new coins received from the swap will inherit the cost basis and holding period of the original coins. This means:
- Cost Basis: The original purchase price of your coins on the old blockchain will continue to be the cost basis for the new coins.
- Holding Period: The length of time you held the coins on the original blockchain will carry over to the new coins. This is important for determining if any future sale qualifies for long-term capital gains treatment, which typically offers lower tax rates.
Special considerations for coin swaps versus hard forks
It's important to note that the tax treatment for a coin swap differs significantly from that of a hard fork. In a hard fork, the blockchain splits, and both chains continue to exist independently, potentially leading to taxable events as new coins are considered to have been received. In contrast, a coin swap involves the cessation of the old coin and a direct transition to the new platform, without the creation of a new, independent cryptocurrency.
How to Manually Account for Coin Swaps in CoinTracker
Accounting for coin swaps can be challenging, especially when the swap occurs at a ratio other than 1:1, as seen with Elrond's 1,000-to-1 swap. For example, if you held 5,000 ERD, after the swap, you would possess 5 EGLD. We will use this example through the rest of the guide.
When dealing with coin swaps in financial tracking tools like CoinTracker, the goal is to ensure that the new tokens inherit the cost basis of the old tokens. Here’s how to do it, using an example transaction where 5,000 ERD were purchased for $130 USD. This works out to a cost basis of $0.026 per ERD:
- Identify the Transaction: Locate the original purchase transaction of the old tokens. In this example, the purchase of 5,000 ERD for $130.
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Add the Swap Transaction: Add a new manual transaction to track the swap from ERD to EGLD.
- Outgoing asset: ERD (amount: 5,000)
- Incoming asset: EGLD (amount: 5)
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Edit the Transaction Details: Initially, the manual transaction you just created may incorrectly appear with a taxable gain because the system interprets it as a trade. We'll need to edit it:
- Click the [...] 3-dot menu for the manual swap transaction.
- Select the option to "Edit proceeds from ERD".
- Adjust to reflect the original $130 cost basis for ERD.
- Then select "Edit cost basis of EGLD".
- Adjust to reflect the original $130 cost basis for ERD.
- Review and Confirm: Ensure that both the proceeds and cost basis accurately represent the initial investment, thus maintaining consistency for tax purposes.
By following these steps, you can correctly record a coin swap in CoinTracker, ensuring that the new token reflects the same cost basis as the original token, avoiding any unintended taxable gains.
Disclaimer: CoinTracker is provided for informational purposes only. This service is not intended to substitute for tax, audit, accounting, investment, financial, nor legal advice. For financial, tax, or legal advice please consult your own professional. The information on CoinTracker is subject to change without notice. All information is provided "as is." CoinTracker disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Please see our full disclaimer.