The Ultimate Guide to Solana Taxes

Solana is known for its low gas fees and fast speeds, but with all the transactions you're executing - yield farming, NFTs, staking, lending, borrowing, and swapping - it can be tough to keep track of your taxes. This guide will help you understand your US tax reporting obligations and show you how to use Bitwave to automate the tracking process and make this tax season a breeze.

Capital Gains Tax

On disposal of a crypto asset, investors will incur capital gains or losses depending on the price change since the asset was originally purchased. Some examples of disposals include:

1. Selling crypto assets for fiat;
2. Swapping one crypto asset to another crypto asset; and
3. Paying for products or services using crypto assets

Income Tax

Income received from staking, yield farming, and airdrops is considered Other Income and will be taxed at your applicable personal income tax rates.

Information You’ll Need for Solana Tax Reporting

Investors will need their Solana transaction history to compute their taxable income and to distinguish between capital gains and Other Income. This information can then be used for reporting to the IRS in your annual tax return.

How to Export Your Solana Transaction History

There are two ways to export your Solana transaction history: 

1. CSV file from block explorers: Investors can obtain a CSV file of their transactions on the Solana blockchain using explorers like Solscan or Solana explorer.
2. Import to your crypto tax software directly: This option is quick and easy. Investors will need to obtain their public wallet address and add it to their crypto tax software like Bitwave. After connecting, Bitwave will automatically import all your Solana transactions.
   

Once you have your Solana transaction history imported into your crypto tax software, the software will compute your income for the year and generate a pre-filled tax report.

How Different Transactions on Solana May be Taxed

Different types of crypto transactions will be treated differently for tax purposes. Here’s what you need to know:

Solana NFTs

Trading or flipping NFTs is considered a crypto-to-crypto transaction and investors will incur capital gains/losses for each transaction.

Since NFTs are considered digital assets by the IRS, acquiring NFTs by paying in crypto would also incur capital gains tax. 

Non-Taxable NFT transactions:

1. Purchasing a NFT with Fiat
2. Transferring a NFT between your own wallets
3. Donating a NFT
   

Reporting of Gains or Losses on NFT transactions will be in IRS Form 8949 and included with Schedule D.

Perpetual Futures on Solana

Perpetual futures on Solana will be treated as an unregulated futures contract for tax purposes. Unregulated futures are taxed differently depending upon whether the individual is a casual investor or a trader as defined by the Internal Revenue Code. Here’s how that works depending on if you’re a casual investor or a trader:

Casual Investor

Gain or loss will be treated similarly to the underlying asset. 

If the contract was held for up to 1 year, it will be considered as short term and taxed at an ordinary tax rate. 

If the contract was held for more than 1 year, it will be considered as long term and taxed at a lower long-term rate.

Gains or losses will be reported to the IRS in IRS Form 8949 and Schedule D

Traders

Traders not opting for Section 475(f) will be subject to Capital gains taxes on their futures gains and losses. They will need to report their Income to the IRS in Form 8949 and Schedule D. In addition, traders can also write off trading-related business expenditures in Schedule C (Internet fees, subscription fees, etc.)

Traders opting for Section 475(f) will be subject to ordinary Income tax rates on their futures gains and losses. Traders will also be required to mark-to-market (MTM) their open positions at the end of the year and gain/loss on such MTM will be included in taxable income.

Traders opting for section 475(f) are required to file Form 4797 and Schedule C with the IRS

Liquidity Mining

Income received by way of fees and rewards for providing liquidity in liquidity pools will be taxed as income based on the fair market value of the asset on the date of receipt.

Check out our detailed guide on reporting liquidity mining income.

Staking Income

Income received from staking crypto will be taxed based on the fair market value of the asset on receipt.

Check out our detailed guide on reporting staking income.

How to Calculate the Cost Basis of Your Solana Investments

Cost basis is important to accurately calculate capital gains on investments and it can also be used as a tool for optimizing your tax position. In simple terms, cost basis means the price paid to acquire an asset. 

The cost basis calculation just discussed was a simple calculation consisting of just 1 buy and 1 sell transaction. However, when there are many buy and sell transactions the method of calculating the gains can vary. Some of the most used methods are FIFO, LIFO and HIFO. 

To wrap our head around all 3 methods, let’s walk through an example.

Tony made the following purchases and sales of Bitcoin during the year 2022:

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Here’s how to compute his gains using FIFO, LIFO and HIFO:

Taxable gains with FIFO

Computing gains with FIFO means reducing the first purchase from the first sale. In simple words, what I acquire first will be the one that I sell first.

Using FIFO, we have a cumulative gain of $24,000.

Taxable gains as per LIFO

Computing gains with LIFO means reducing the last purchase from the first sale. In other words, under LIFO we assume that the last purchase will be sold first.

Using LIFO, we have a cumulative gain of $21,000.

Taxable gains as per HIFO

Computing gains with HIFO means reducing the highest purchase price from the first sale. In other words, under HIFO we assume that the highest price we paid for purchasing will be disposed of first.

Using HIFO, we have a cumulative gain of $19,000.

After calculating taxable gains using each method, the FIFO method would result in the most taxable gains ($24,000), while the HIFO method would result in the least taxable gains ($19,000). By optimizing the cost basis, an investor can reduce the amount of taxable income and the amount of tax they owe.

Master Solana Tax Reporting with Bitwave

Bitwave comprehensively tracks crypto tax liabilities on an ongoing basis. Bitwave tracks the cost basis of every transaction and calculates the gains and losses for both short term and long term capital gains (see our Gain / Loss Report below).  

Plus, Bitwave allows you to select the best crypto tax strategy for your business goals (FIFO, LIFO, Cost Averaging, Spec ID, HIFO, Custom). 

As you can see, Bitwave streamlines your Solana accounting workflow to help track and monitor taxes. Want to learn more? Contact us or schedule a demo today!