Cardano is a layer one blockchain fighting it out with the likes of Ethereum and Solana to be the number one financial operating system of the new crypto world.
As the Cardano blockchain is decentralised, it needs a method to validate transactions. It does this through its proof of stake consensus mechanism.
When a new block needs to be added to a PoS blockchain, individuals known as “validators” contribute – or “stake”- their digital assets. In return, validators have the opportunity to validate new transactions, update the blockchain, and earn rewards.
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Staking is a fantastic opportunity to participate the transaction validation process and earn rewards. At the present time you can expect to earn an APY of roughly 4% from staking your Cardano tokens.
Tax Headache
Generally, in most parts of the world, any income earned through staking is taxed at your income tax rates, similar to what you would be paying on your monthly salary.
But it can become a bit of a headache when it comes to figuring out how much tax you actually have to pay on the rewards for the following reasons.
Rewards are paid every 5 days; this means if you are staking for a full year, you will receive staking rewards 73 different times. Most wallets will give you a good record of the dates and number of tokens you received, but not the price that Cardano was at the time you received each reward.
When you are reporting your income tax on those rewards it will be vital to know what the value of each reward was at the time you received it.
Example
- 01/04/2022 – Tokens received 3.9 @ $1.20
- 06/04/2022 – Tokens received 3.8 @ $1.10
- 11/04/2022 – Tokens Received 4.1 @ $1.15
If you have to go back and find the price of Cardano in your local currency on 73 different dates then this will be a lot of work for you.
Thankfully there are tools that you can use to help you with this exercise.
PoolTool.io
PoolTool.io is an online platform built to facilitate the interaction between SPOs and their stakeholders. It is a really useful source for tax rewards data for ADA holders. Let’s look at how it works now step by step:
Step 1
Click the ‘Rewards Data For Taxes’ Button
Step 2
Copy the wallet address that holds your staked Cardano to the following location.
Step 3
This will then give you a lot of statistics on your staking rewards such as the average % ROS (Return on Stake) .
Most importantly it will also give you the total rewards received over the date ranges you choose and the value of these in your local currency.
Step 4
Next if you want to download the data and work with it on Excel, you can use PoolTool’s export tool to download all the data you need.
Step 5
You can simply total the staking reward value received for the specific data range and include this figure in your next tax return. A HUGE TIME SAVER.
Hopefully you found this tax reporting tip useful.
If you prefer this to be all explained with some visuals and audio then you can also check out my YouTube video on the subject:
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.
