Moon Distro = Airdrop = Ordinary Income

Officially, the monthly 'Moon distro' is an airdrop. Fortunately, the IRS has already specified that new coins received through an airdrop are taxed as ordinary income. Therefore, you owe income taxes on Moons in your vault due to each distribution - regardless of whether you intended to own these coins (note to the trolling Butters who set up vaults).

The amount of income is the fair market value of the airdropped coins when they are received in the wallet. Suppose you are reporting your Moon income correctly. In that case, each monthly distribution is a new taxable income event, no different than receiving a monthly paycheck…except it's pretty easy to track dollars as they are pegged to dollars. So, you need to follow the exact USD price of Moons at distribution and know how many you received at that price.

If you sell your Moons for a stablecoin or USD at the exact price you received them, then there is not much else to consider regarding taxes. However, if you sell your Moons for a profit compared to the price they were distributed to you, you have to pay capital gain on the increase.

Price Change = Capital Gains/Loss

Capital gains are generally broken into two categories: long-term and short-term. Short-term capital gains are specified for any asset you receive and sell for a profit in under a year. The tax rate for short-term holders is 30%. Long-term works the same, except the holding period is over one year, and the tax rate is 15%.

Example

Let's say you get 100 Moons for this distribution, and the price is $.35 when you receive them. You decide to sell in November when the price hits $.70. Your taxes will look something like this:

The taxable rate will depend on your total income. Federal tax rates range from 10%, 12%, 22%, 24%, 32%, 35% and 37%. State income taxes vary from State to State. The good thing is if you sell at a loss, a price less than the price you received the Moons at, you can count this towards your $3,000 yearly loss claim.

That was the simple math.

Liquidity Providers

We all talk about impermanent loss as the most significant risk to providing liquidity; I say, "It's taxes."

Providing liquidity is a taxable event on Sushi because you are trading your Moon/Eth pair for a reward token, which you can also stake for additional rewards Sushi/Moons rewards are also taxable as income when you unstake.

This means the Moons and Eth are technically sold when you provide liquidity, and any gains/losses must be taxed from the original distro/purchase price. Then, the fees and rewards you receive when unstaking are seen as income and taxed accordingly; unless you sell those fees and rewards for a profit, the profit will be taxed as capital gains/losses.

Your new entry price and holding period for Moons/Eth begins when you withdraw your liquidity from the pool. Any future trades/swaps/sales of these assets will be taxed from the withdrawal time and price.

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Soooo….yeah, this is all very complicated. If Moons rip like we all expect they will in the bull run, god help us during tax time '23, '24, and '25.