Rebase Tokens Guide: What Are They & How Do They Work?
What is a rebase token?
A rebase token, also known as an elastic token, is a kind of cryptocurrency where the supply is algorithmically adjusted to control price.
To do this, rebase tokens automatically burn or mint new tokens depending on whether the price needs to go up or down.
Each rebase token protocol works slightly differently, depending on the code behind it and the purpose of the protocol.
How do rebase tokens work?
Rebase tokens are built on smart contracts. These are pieces of code that self-execute a specific action (or actions) when predetermined conditions are met. In the instance of rebase tokens, smart contracts allow the automation of a given token's supply.
The formula to adjust the supply is predetermined and can vary, but it is generally based on the target price of the token and the current market price. So if the market price is lower than the target price, the token supply will burn to bring the price back up, and vice versa.
But this isn't always how rebase tokens work. More recently, DeFi devs have caught onto rebase token protocols in order to pay out rewards.
To understand the differences between them, let's take a look at some examples of popular rebase tokens.
Rebase tokens examples
Ampleforth (AMPL) is a popular investment and a great example of a rebase token as every 24 hours, the supply of AMPL tokens is adjusted to maintain the AMPL target price - so AMPL tokens in your wallet may automatically increase or decrease every 24 hours.
Staked Ether (stETH) is a Lido Finance protocol token that uses a rebase function in order to maintain price parity and pay out staking rewards. stETH tokens rebase once a day at 12PM UTC when the oracle reports changes in ETH2 deposits and changes in ETH rewards from users.
OlympusDAO is an example of how DeFi devs utilized rebase functions to create innovative new investment opportunities - by distributing rebase rewards to token holders. If you stake on OlympusDAO - you'll be given a token in return that rebases your rewards. For example, if you stake OlympusDAO's native token OHM, you'll get sOHM in return. Rebase rewards are allocated at specific intervals (usually around every 8 hours).
What are the benefits of rebase tokens?
Price stability: The most obvious benefit of rebase tokens is price stability. Compared to other cryptocurrencies, rebase tokens can theoretically maintain a relatively stable price despite a volatile market.
Growth: This price stability may attract more investors who are looking to avoid the risks associated with traditional cryptocurrencies. As well as this, as this is a relatively new technology, we're only in the infancy of finding out what devs can do with rebase tokens.
Decentralization: Like most cryptocurrencies, the majority of rebase tokens are decentralized - making them less vulnerable to market manipulation.
What are the risks of rebase tokens?
Risk of failure: All cryptocurrencies can fail, and rebase tokens are no different - whether that's due to a security vulnerability in the code, technical issues or a lack of adoption.
Volatility: Like above, although many rebase tokens are designed to maintain a stable price, this isn't always the case in extreme market conditions. In 2022, OlympusDAO experienced extreme volatility after unprecedented sell pressure and had to slash reward rates to try and maintain stability.
Inaccessibility: Due to the complex nature of some rebase token protocols, some investors may be put off due to a lack of understanding of the underlying technology.
Rebase token taxes
The taxes you'll pay on your rebase tokens all depend on the specific transaction you're making and how your rebase protocol works. We'll start with the basics and work through each transaction.
Tax on rebase protocols that don't pay rewards
If your rebase token doesn't pay you out rewards - like AMPL - then this likely wouldn't be subject to tax. Though no tax office has released specific guidance on rebase tokens - we can liken these kinds of rebase protocols to a stock split. A stock split is when a company splits existing shares into further shares to increase liquidity. Most tax offices don't view stock splits as a taxable event as although the investor may have more shares, they have the same market value as they previously did. With this view, it would be reasonable to assume token rebase protocols where no rewards are paid would not be a taxable event as investors realize no gain and make no additional income.
However, where a rebase protocol pays out a reward - like stETH or OHM, the tax treatment is different. So let's break down the different transactions involved.
Tax on purchasing rebase tokens
On the surface, purchasing rebase tokens may not seem like a taxable event as buying crypto with fiat is tax free. However, many rebase tokens are only listed on dexes. As such, you'll often be swapping one crypto for your rebase token - like DAI for OHM or ETH for AMPL. In most countries - including the US, Australia, Canada, and the UK - swapping one crypto for another is a taxable event and you'll pay tax on any gain as a result of the transaction.
It isn't the purchase itself you'll pay tax on, but any change in value on the token you're swapping since you acquired it. For example, if you traded ETH for AMPL, you'd need to take the cost basis of your ETH (what it cost you + fees or the fair market value of ETH on the day you acquired it) and subtract that from the fair market value of ETH on the day you trade it for AMPL. This figure plus any fees will also be the cost basis for your AMPL should you later sell or swap your tokens.
Tax on rebase rewards
If your tokens pay you out a reward - like OHM or stETH - it's likely you'll need to pay Income Tax, based on the fair market value of your rewards in your fiat currency - like USD or AUD.
This said, no tax office has yet released any guidance on rebase rewards, so it's advisable to speak with an experienced crypto accountant in your country to seek advice on your potential tax liability from rebase tokens.
To identify your income from rebase rewards, you'll need to identify the fair market value of each batch of staking rewards when you receive them.
Tax when you sell or swap rebase tokens
You'll need to pay tax on any gain you make if you later sell or swap your rebase tokens - even if you've already paid Income Tax on rewards in most instances.
To calculate your capital gain or loss, take the cost basis of your rebase tokens (or fair market value of rewards on the day you received them) and subtract it from your sale price or the fair market value on the day you swapped them.
In most countries, the amount of Capital Gains Tax you'll pay will vary depending on your total annual income and how long you've held the asset. As a general rule of thumb, the higher your income, the more tax you'll pay. But if you've held your rebase tokens for more than a year at the point you sell, many tax offices offer a significant discount on the amount of tax you pay. For example, long-term gains in Australia receive a 50% discount, while in the US you'll pay a much lower 10% or 20% tax rate depending on how much you earn.
How to report taxes on rebase tokens
Precisely how you report your crypto taxes depends on where you live. In general, you'll report your rebase taxes on your annual tax return - potentially in an additional form depending on your tax office. You'll need to report any additional income from rebase token rewards, as well as any capital gains (or losses - you can offset these against gains).
How Koinly helps with crypto taxes
Koinly can help with your crypto taxes by importing your trades, calculating your capital gains and losses (as well as short-term and long-term gains and losses), any crypto income, expenses, and more - as well as generating your crypto tax report, ready to file with your tax office. For more information on how Koinly deals with rebase tokens - you can check out our guide.
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