Sky (Maker) Taxes Guide
Welcome to the intricate world of decentralized finance (DeFi), where traditional banking systems are challenged, and a new frontier of financial interaction is carved. At the center of this evolution lies Sky (formerly MakerDAO) with its twin tokens, USDS and SKY (formerly DAI and MKR), sparking revolutionary changes and posing intriguing tax implications.
Do you pay taxes on Sky?
Yes. You need to pay taxes relating to your Sky investments.
Crypto is subject to either Income Tax or Capital Gains Tax - it all depends on the specific transaction you're making. Let's take a look at how different transactions in Sky and the tax implications of each.
How to do Sky crypto taxes
Record All Transactions: Track every transaction you make within the Sky system, including generating or repaying USDS, buying or selling SKY, or any other transactions. You'll need to note the date, the amount, and the price in fiat currency at the time of each transaction. A crypto tax tracker like Koinly does this for you.
Calculate Capital Gains or Losses: If you've bought, sold, or traded SKY, you will likely need to calculate capital gains or losses. This will typically involve subtracting the price you bought the SKY for from the price you sold it for. If you received SKY as part of the Sky ecosystem (like from staking), it might be considered income at the time you received it, and then any increase in value from that price could be a capital gain. Manually calculate your capital gains or losses, or use Koinly to do this for you.
Interest Income: If you've earned USDS from staking or lending, this could be considered interest income, which might also be taxable. Manually calculate your income, or use Koinly to do this for you.
Reporting: Report all this information on your tax return. In the US, this will likely involve Form 1040 for your income taxes. You’ll also need to report your net capital gain and loss on Schedule D and any crypto income on Schedule 1 and potentially Schedule C (please note that tax forms vary from one country to another.) Koinly generates the correct forms and reports for your country.
Which transactions will you pay tax on?
Navigating the maze of DeFi taxes, especially in the context of Sky taxes, can prove to be a challenging endeavor. This complexity mainly stems from two factors. First, tax authorities around the globe, including the IRS and HMRC, have yet to provide explicit and comprehensive guidance on DeFi tax considerations, often leading to more questions than answers.
Furthermore, the inherent intricacies of each DeFi protocol introduce unique challenges. With each specific transaction potentially triggering a taxable event, a deep understanding of how individual protocols function is crucial to determining the probable crypto tax implications.
As it's specific transactions that create a taxable event - we need to look at how each specific protocol works to figure out the likely taxation.
Do you pay tax when you deposit collateral on Sky?
We’ll start with the obvious - the IRS hasn’t issued any clear guidance on the tax implications of crypto used as collateral. So it all comes down to how your specific DeFi protocol works as to the potential tax consequences.
When you deposit your chosen crypto as collateral into a Sky vault - unlike with many other DeFi protocols, you won’t get a token back representing your asset.
Instead, when you borrow USDS (or another asset if you’re using a multiply vault) it’s held in escrow by the Sky.money protocol.
What all this means from a tax perspective is that it’s likely depositing your crypto to a Sky vault cannot be considered a taxable event. You’re not earning new crypto coins or tokens so it can’t be subject to Income Tax and you’re not selling, trading, or spending your crypto, so it can’t be subject to Capital Gains Tax.
Do you pay tax when you borrow USDS on Sky?
When you borrow USDS using the Sky protocol - your collateral is held in escrow and you receive new USDS tokens proportionally to the amount of collateral you put up at the agreed collateralization ratio.
Again, from a tax perspective - this is foggy at best. You’re not selling your collateral or trading it in exchange for USDS, so it can’t be viewed as a Capital Gains Tax disposition. You’re also not making an income through a particular activity - for example, mined crypto or staking rewards, so it can’t be viewed as income and subject to Income Tax.
With this in mind, it’s likely that when you receive USDS, this may be a tax free event, but you should always speak to an accountant for specific advice.
Do you pay tax on fees on Sky?
You'll pay a few fees when using the Sky protocol including gas fees for transactions and a variable-rate stability fee.
The IRS and other tax offices haven't released any guidance around crypto fees and whether they're tax deductible.
When it comes to stability fees, we can think of these as a kind of interest expense. However, whether that interest expense is tax deductible will come down to how you're using your loaned crypto, for example:
If you're using the DAI for a personal purpose - your interest will not be tax deductible.
If you're using the DAI for a business purpose - that interest may be tax deductible.
If you're using the DAI for investment purposes - that interest may be tax deductible.
Gas fees are equally complicated. If you’re paying a gas fee related to buying, selling, or trading crypto, then you can add this to your cost basis. However, with Sky, your gas fees are related to moving your crypto to a vault - which is more akin to a transfer. It’s not clear whether transfer fees would be tax deductible. We recommend a conservative approach where you treat transfer fees as disposals to avoid any unwelcome audits from the IRS.
Do you pay tax when you create a multiplied position on Sky?
When you create a multiplied position using Sky - though it’s a couple of simple clicks for you, a lot goes on in the background, automated by smart contracts. Multiplied positions work similarly to the borrow vaults.
So you’re depositing your asset and receiving a specific crypto in return. However, in the background, you’re actually borrowing USDS still, and using that USDS to purchase more crypto. Lots of investors were using their loaned USDS to make purchases of other crypto assets anyway - this product just simplifies that process for them.
From a tax perspective - it’s not clear. Though there may be a trade of crypto going on in the background - via the smart contract - on the user’s end, it works very similarly to taking out a standard USDS loan on Sky, which would likely not be subject to tax.
Do you pay tax on liquidations on Sky?
If your collateral drops below the required collateral ratio (usually around 1.5X), the Sky protocol automatically liquidates enough of your collateral to return to the correct ratio. You'll also pay a penalty.
Liquidation is seen as a kind of disposal - like selling, trading, or spending your crypto - so it's subject to Capital Gains Tax.
To calculate whether you'll pay tax on your liquidated crypto, you need to subtract your cost basis (the price of your asset at the time you acquired it and any transaction fees) from the price of the crypto at the point it was liquidated. If the price of your crypto has increased - you'll pay Capital Gains Tax on that profit. So even though you're technically making a loss through liquidation, you'll still pay Capital Gains Tax if you have a profit.
As for penalty fees - the IRS doesn't have clear guidance on this. They can be viewed as similar to 'accelerated interest expenses' and potentially tax deductible if you've used your loaned crypto for business or investment purposes provided you meet the IRS criteria.
Do you pay tax on your USDS?
So you’ve borrowed USDS using the Sky protocol - now what?
Whether you’ll pay tax on your USDS depends on what you do with it. If you sell, trade, or spend your USDS - you’ll need to pay Capital Gains Tax on any profit you make as a result of that transaction.
As USDS is a stablecoin pegged to the US dollar, it’s unlikely that you’ll have any particularly large profits from these transactions as your cost basis will be very similar to your sale price. This said, you still need to report these transactions to the IRS on Form 8949 - even if you have no realized gain or loss.
If you instead invest your USDS - into a liquidity pool for example - you may be liable for Income Tax on any new coins or tokens earned depending on the specific protocol.
You can learn more about liquidity pool taxes in our DeFi tax guide. But in brief, if you’re trading liquidity pool tokens and realizing a gain, this will be subject to Capital Gains Tax. Meanwhile, if you’re earning new tokens or coins, this is more likely to be subject to Income Tax.
Do you pay tax on SKY tokens?
Want to vote on key issues around Sky's future development? You’ll need SKY tokens.
When you buy SKY tokens - provided you purchase them with fiat currency and not another cryptocurrency, you’ll pay no tax for this transaction. But if you trade crypto for your SKY tokens, you’ll need to pay Capital Gains Tax on any profit as a result of your trade.
Like with any other cryptocurrency - you’ll pay Capital Gains Tax on any profit if you sell or trade your SKY token(s).
If you decide to stake your SKY tokens, if you’re paid out new coins and tokens, you may need to pay Income Tax based on the fair market value of those tokens at the point you receive them.
What do you need to report to your tax office?
It depends on where you live - each tax office has different reporting requirements for crypto, but you should keep good records of your Sky transactions regardless.
In the US, you need to report each taxable crypto transaction on Form 8949, including:
A description of the asset
The date you acquired the asset
The date you disposed of the asset
The sale price at fair market value
The cost basis of the asset at fair market value
Your capital gain or loss
You’ll also need to report your net capital gain and loss on Schedule D and any crypto income on Schedule 1 and potentially Schedule C.
It’s a lot of work. If you’re an active investor on Sky.Money or Summer.Fi, as well as stacking the protocol on other DeFi platforms, your transactions can quickly mount into thousands per financial year.
You’ll need good records of all your transactions on Sky with all the information - you can do this manually or with a crypto tax app. Let’s look at both.
Does Sky provide a tax report?
No. Sky doesn’t provide tax reports and you can’t download one from the Summer.Fi either. You can however download your transaction history from Sky. There are two ways you can do this:
Use crypto tax software to get your Sky transaction history. You can connect crypto tax software to the wallet you use to interact with Sky via API. This will automatically import your Sky transaction history to your app, identify your taxable transactions, and calculate your capital gains, losses, and income.
Get a CSV file of your Sky transaction history. You can’t download a CSV file from the Sky app directly, but you can use third-party services like Etherscan to get a CSV file of your transaction history on Sky. You can then use this CSV file to identify your taxable transactions, capital gains, losses, and income yourself.
Does Sky supply a financial statement?
No. You won’t receive a financial statement from Sky.
How to generate a Sky tax form
You can do this manually or with a crypto tax app. Let’s look at both.
If you’re doing your taxes yourself, you need a complete transaction history from Sky for the financial year. You can get a CSV file of this using sites like Etherscan. You’ll then need to identify each taxable transaction, the subsequent income or capital gain/loss and report this to the IRS using Form 8949 for capital gains and losses, Schedule D for net capital gains and losses, and Schedule 1 for crypto income (and potentially Schedule C too for income).
Alternatively, use a crypto tax app to do all this for you. All you need to do is sync your Sky transactions using API. Your crypto tax app will then identify your taxable transactions and calculate any capital gains, losses, and income for you. You can then download a tax report specific to your location to hand over to your tax office - for example, you can download a pre-filled Form 8949 and Schedule D.
Sky CSV export
Sky doesn’t have an option to export a CSV file of your transaction history. But you can use Etherscan to download a CSV file, or create a CSV file yourself and do your taxes manually. Depending on the wallet you’re using to interact with the app - you may be able to download a CSV file from your wallet too.
Sky tax API
The easier option is to use crypto tax software to get your Sky transaction history via API.
To do this, you’ll need your Ethereum public address. You can normally find this in the wallet you’re using to interact with the app. We’ve got instructions on how to get your public address for most of the wallets supported by Sky, you can find them on our integration pages - just search for your wallet.
Does Sky report to the IRS?
While you don’t need to complete any KYC verification processes to interact with the Sky.Money app the specific wallet you’re using to interact with Smy protocols might. If you’ve completed KYC verification at any point, the IRS has previously requested this information from crypto exchanges to ensure tax compliance.
As well as this, many wallets require you to link a credit or debit card. The IRS can also request bank statements during an audit.
If you’re moving your USDS or SKY tokens onto centralized exchanges, many of these exchanges report to the IRS by sending out 1099 forms.
Overall, the best way to stay tax compliant and avoid an audit from the IRS is to report your crypto taxes accurately.
Koinly is a Sky tax calculator & reporting tool
If you’ve been wondering is Koinly a Sky tax calculator tool, the answer is, yes! Not only can Koinly import Sky transaction history, but Koinly can also calculate your Sky taxes in a format that makes sense for your country’s tax office.
As a Sky tax calculator, Koinly is able to do a bunch of impressive tasks that save you time and can even save you from paying too much taxes.
Koinly will import all your Sky trades.
Koinly will then convert your Sky transactions into your country’s currency, at fair market value. This in itself is a massive time saver.
Finally, Koinly works out which of your Sky trades are taxable, and which are not - calculating your Sky gains/losses, income, and more. All of this is really important for being able to submit an accurate Sky tax return to your tax office.
