A token migration happens when a blockchain undergoes a major update to its technology, requiring users to exchange their old tokens for new ones.
Examples of token migrations:
- LEND migrated to AAVE.
- BNB transitioned from an ERC-20 token to its own native Binance Coin.
- ANS migrated to NEO.
Token migrations are non-taxable events
A token migration is not considered a taxable event if the original blockchain is completely abandoned and all assets are transferred to a new blockchain. This is because the migration is treated as a continuation of the original investment, rather than a disposal or realization event that would trigger capital gains tax.
Tax implications of token migrations
When a token migration occurs, the new tokens you receive inherit these tax attributes from the original ones:
- Cost basis: The original purchase price of your tokens on the old blockchain becomes the cost basis for the new tokens.
- Holding period: The time you held the tokens on the original blockchain carries over to the new tokens. This is essential for determining eligibility for long-term capital gains tax rates, which are generally lower.
By inheriting these attributes, the migration ensures continuity for tax purposes.
Token migrations vs. hard forks
The tax treatment for token migrations is significantly different from that of hard forks:
- Hard forks: In a hard fork, the blockchain splits into two, and both chains continue to exist independently. This often results in the receipt of new coins, which may be considered taxable.
- Token migrations: A token migration involves retiring the old token and transitioning directly to the new one on an updated platform. No new or independent cryptocurrency is created, so the event is generally not considered taxable.
Understanding these differences is key to handling taxes correctly.
How to track token migrations
Tracking token migrations can be complex, especially when the migration occurs at a ratio other than 1:1. When accounting for token migrations in your account, it's important to ensure the new tokens inherit the cost basis of the original tokens. See the example below for how to do this.
Example of tracking a token migration
Using Elrond’s token migration of 1000-to-1 ratio:
- Original tokens held: 5000 ERD
- Migration ratio: 1000 ERD = 1 EGLD
- New tokens after migration: 5 EGLD (5000 ERD/1,000 = 5)
- Total purchase price: $130
- Cost basis per ERD: $0.026 per ERD ($130/5000 = $0.026)
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Identify the transaction: Locate the original purchase of the old tokens.
- In this case, you bought 5000 ERD for $130.
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Add the migration transaction: Add a new transaction to track the migration from ERD to EGLD.
- Outgoing asset: ERD (Amount: 5000)
- Incoming asset: EGLD (Amount: 5)
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Edit the transaction details: The transaction you created may initially show a taxable gain, as the system could interpret it as a trade. To correct this:
- Click the [...] icon for the added transaction.
- Select Edit proceeds from ERD and adjust it to reflect the original $130 cost basis for ERD.
- Select Edit cost basis of EGLD and adjust it to reflect the same $130 cost basis for ERD.
- Review and confirm: Double-check that both the proceeds and the cost basis correctly represent the initial investment, ensuring tax consistency.
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