Pre-Migration OHM Capital Gain Considerations

While we continue to believe that even during rough periods in the market that (3,3) and chill is the optimal approach given our own personal long-term focus, we realize that not every Ohmie decided to weather last year’s storms that way due to either a different investment philosophy or other reasons personal to them. Accordingly, we wanted to provide some guidance as to how a United States based Ohmie might calculate capital gains or losses on their pre-migration OHM holdings and we hope that this analysis will also be useful to non-US based Ohmie by analogy.

Calculating Pre-Migration sOHM Capital Gains / Losses:

Assuming that treating sOHM staking rewards as stock splits by analogy (as discussed in the previous article) is a reasonable approach, we needed to come up with a way to effectively calculate the adjusted tax basis. In a FAQ, the IRS provides guidance on how that should be handled when it comes to shares of stock. We have reproduced the guidance below as we will be leveraging those concepts while also providing a framework for OHM.

Question

How do I figure the cost basis of stock that split, which gave me more of the same stock, so I can figure my capital gain (or loss) on the sale of the stock?

Answer

A stock split occurs when a company creates additional shares, thus reducing the price per share. If you own stock that has split and now own additional shares, you must adjust your basis per share or per the lots of the stock you own.

If the old shares of stock and the new shares are uniform and identical:

Allocate the basis of the old shares to the old and new shares.

Determine the per share basis by dividing the adjusted basis of the old stock by the number of shares of old and new stock.

If you purchased the old shares in separate lots for differing amounts of money (a different basis per share in different lots):

Allocate the adjusted basis of the old stock between the old and new stock on a lot by lot basis. Example: Suppose you have 200 shares of XYZ Inc. common stock. You initially bought 100 shares at $10 per share. You later bought another 100 shares at $12 per share. XYZ Inc. announces a two for one stock split and issues you 200 additional shares. You update your records. The first lot of 100 shares is now 200 shares. Your total basis in the 200 new shares is the same $1,000 basis you had in the 100 shares before the split. The new per share basis is $5 ($1,000/200 = $5).

Similarly, your second lot of 100 shares is now 200 shares. Your total basis in these 200 new shares is $1,200, the same as your basis in the 100 shares before the split. The new per share basis is $6 ($1,200/200 = $6).

Pretty straightforward and easy right? We hate to break it to you, but it gets a wee bit more complex as we transition to thinking about it in the context of OHM.

The rebasing nature of pre-migration sOHM necessitates knowing a few additional pieces of information other than the obvious ones noted above when it comes to adjusting stock basis. Whether it is stock or OHM we can easily make note of our initial cost basis in order to establish our starting point. As a reminder, don’t forget to track the ETH gas fees that were paid to either acquire or dispose of OHM as those amounts are also includable in the basis calculation.

The first crucial piece of additional information needed when performing the capital gain or loss calculation for OHM is what the current index was at the time of staking. We have included below a screenshot of a pre-migration Olympus Staking Dashboard for illustrative purposes.

Hopefully you made note of the relevant current index when you initiated staking as that will greatly simplify calculating your adjusted basis for any pre-migration OHM that you sold during the year. Knowing this information will be absolutely essential should you have made your investment in multiple tranches as we will illustrate below.

So what do you do if didn’t know how important the index was and didn’t make note of it? Luckily if you’re an Ohmie, there is a query (https://dune.xyz/queries/166737) that has been written that will provide you with the exact current index each time a particular wallet staked sOHM and we have reproduced below some actual wallet data that will be used to develop illustrate sample capital gain transaction calculations.

The sample above shows three different staking events that took place on different days and in different amounts. For purposes of keeping the math easy, let’s use the following as the relevant USD amounts involved (assume values include gas fees as appropriate):

Current Price of OHM: $1,000 (net of unstaking and selling related gas fees)

Total Cost Basis 8/11/2021: $850 with a per coin basis of $425

Total Cost Basis 8/18/2021: $2,200 with a per coin basis of $275

Total Cost Basis 9/19/2021: $11,500 with a per coin basis of $575

In order to determine how much each tranche grew due to the compounding of the rebases we need to calculate a ratio. As the pre-migration Dashboard’s Current Index only shows one decimal point, we will only use that for the entry point as well in order to be consistent.

8/11 Tranche: (30.7 / 10.6) = 2.89 X 2 OHM = 5.78 for an adjusted per coin basis of $147 (850 / 5.78).

8/18 Tranche: (30.7 / 11.7) = 2.62 X 8 OHM = 20.96 for an adjusted per coin basis of $105 (2,200 / 20.96).

9/19 Tranche: (30.7 / 17.4) = 1.76 X 20 OHM = 35.20 for an adjusted per coin basis of $327 (11,500 / 35.20).

Accordingly, the total staked OHM after rebases would be 61.94 compared to the purchased OHM balance of 30.

Now let’s say that the Ohmie in question decided to unstake and sell OHM under various scenarios. Various methodologies are available in terms of actually calculating the amount of capital gain to be recognized. For example, the Ohmie could use FIFO (first in, first out), LIFO (last in, last out), or even HIFO (highest in, first out).

Liquidate Entire Position:

If liquidating the entire position (currently 61.94 OHM), we don’t need to determine the adjusted cost basis per coin. Instead, we can simply calculate the gain by taking the gross proceeds and subtracting the original cost basis to arrive at a gain of $47,390 ((1,000 X 61.94) — (850 + 2,200 + 11,500)).

Liquidate 40 OHM on a FIFO Basis:

This transaction would impact all three tranches by removing all of them from the first two acquisitions and a portion of the last acquisition. The breakdown of the gain calculation is as follows:

Proceeds: $40,000 (40 X 1,000)

FIFO Layer 1 Cost: ($850) — entire layer is being sold so no need for adjusted per coin cost

FIFO Layer 2 Cost: ($2,200) — entire layer is being sold so no need for adjusted per coin cost

FIFO Layer 3 Cost: ($4,336) — 13.26 coins X 327

Capital Gain: $32,614

Liquidate 40 OHM on a LIFO Basis:

This transaction would impact two of the three tranches by removing all of them from the most recent acquisition and a portion from the second acquisition. The breakdown of the gain calculation is as follows:

Proceeds: $40,000 (40 X 1,000)

LIFO Layer 1 Cost: ($11,500) — entire layer is being sold so no need for adjusted per coin cost

LIFO Layer 2 Cost: ($504) — 4.8 coins X 105

Capital Gain: $27,996

Liquidate 40 OHM on a HIFO Basis:

This transaction would impact two of the three tranches by removing all of them from the most recent acquisition and a portion from the first acquisition. The breakdown of the gain calculation is as follows:

Proceeds: $40,000 (40 X 1,000)

HIFO Layer 1 Cost: ($11,500) — entire layer is being sold so no need for adjusted per coin cost

HIFO Layer 2 Cost: ($706) — 4.8 coins X 147

Capital Gain: $27,794

The Ohmie would recognize the most gain through utilizing a FIFO approach and the least amount of gain using the HIFO approach as one would expect. Being able to track acquisitions by tranche makes it much easier to determine which methodology is the most optimal and also provides the appropriate level of support should the transaction be examined by a tax authority.

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, legal, and tax matters

Follow us on Twitter: @SherpaLibrary
Read it first on Medium
Find what you want at SherpaLibrary Discord
Become an Ohmie on Discord
Join the discussion on the Forum

And written by….@BowTiedNaga