Michelle Legge
By Michelle LeggeHead of Crypto Tax Education
Updated May 8, 2024
This article has been fact checked and reviewed as per our editorial policy.

Terra Tax Guide: How to Calculate and Report

Terra (LUNA) is one of the most popular altcoins around - hitting new highs throughout the last year where the rest of the market struggled. But wherever you live, your tax office is going to want to know about your gains and income. We’re covering all you need to know about Terra LUNA, including what Terra LUNA is, the Terra ecosystem, and how Terra LUNA works, as well as your Terra taxes, what you’ll pay, and how to calculate your Terra taxes.

Update May 2022

In light of the LUNA and UST crash in May 2022, we've updated this piece to give you the best possible information about how to do your Terra taxes. If all you want to know about is how to deal with your LUNA or UST in the aftermath of the crash, skip ahead to this section and check out our blog on everything you need to know about the Terra crash.

If you're looking for information on how to do your LUNA/LUNC taxes with Koinly - check out our help guide.

What is Terra LUNA?

Terra is a blockchain network specializing in stablecoins, while LUNA is one of the native tokens. It was founded in 2018, uses Tendermint Delegated Proof of Stake (DPoS) for a consensus mechanism, and provides smart contract capability for those all-important DeFi protocols.

Unlike many stablecoins that utilize fiat currency as a reserve, each Terra stablecoin can be converted into the native token LUNA.

As well as pegging stablecoins, users also pay network fees (gas fees), stake as part of the DPoS consensus mechanism, and participate in governance using LUNA.

An infographic explaining the Terra network, presented by Koinly crypto tax calculator

How does Terra LUNA work?

One of the many things that makes Terra different is the method used to maintain price parity for stablecoins.

Most collateralized stablecoins, like BUSD or DAI, let investors swap their stablecoin(s) for an equivalent amount of a given fiat currency - like USD.

But Terra's stablecoins, like TerraUSD, use algorithmic methods to peg the value and manage the supply. There's a lot of coding behind this, but in layman's terms, each stablecoin is backed by the governance and utility token LUNA. So instead of swapping for a fiat currency at any time, investors can 'cash out' for LUNA instead. We'll use an example to explain.

An infographic with a logo of Terra and UST, presented by Koinly crypto tax calculator


Let's say you want $50 of TerraUSD (UST), which is equivalent to 50 USD. To mint your UST, you need to convert $50 of LUNA tokens (roughly 0.51922 LUNA at the time of writing).  The LUNA you supply is burnt and in turn, you receive 50 UST. When you want to swap UST back for LUNA, you'll do the same process in reverse.

How does TerraUSD work?

Even if the market price of UST to USD fluctuates marginally, the conversion rate for minting is always set at 1:1. This gives UST its price stability. We’ll use another example to highlight how the algorithm works.

The price of 1 UST falls to $0.97 - so 3 cents off the value it's pegged to. The algorithm is still treating all conversions of UST to Luna as $1.

An arbitrageur spots this fluctuation and sees a quick gain. They buy 100 UST for $97 and convert it to $100 of LUNA and make $3.

The $3 profit sounds pretty small, but the reality is most arbitrage traders do this on a much larger scale and it's this large-scale arbitrage that stabilizes UST price.

The increase in UST purchases raises the price of UST as the supply of UST decreases as Terra burns the UST in exchange for LUNA. Quite quickly, the $0.03 gap closes, and the arbitrage opportunity with it.

Terra isn’t the only crypto that relies on arbitrageurs to stabilize markets, many dexes like Uniswap do the same thing.

An infographic explaining crypto arbitrage, presented by Koinly crypto tax calculator

What’s the Terra ecosystem?

The purpose of LUNA, TerraUSD, and other native tokens on the Terra network? To power the Terra ecosystem - the network of platforms built on the blockchain.

The Terra blockchain has expanded to include more than 100 natively built projects including NFT collections, DeFi protocols, and Web3 apps, as well as support for a wide variety of already popular projects. Some of the most popular projects within the Terra ecosystem include:

  • Wallet: Terra Station is the most popular native Terra wallet that lets you store, send, receive, and stake LUNA to earn.

  • Lending and Saving: Anchor is a popular savings protocol offering stable yields on Terra stablecoins through lending.

  • Yield Farming: Spectrum protocol is a yield optimizer for the Terra ecosystem that lets investors automatically compound and stake.

  • DEX: Astroport is a decentralized and permissionless Terra marketplace that lets you trade Terra tokens, as well as provide liquidity to earn.

  • Derivatives: Leverage is coming to the Terra ecosystem in the form of Levana and Vertex.

  • Bridge: Terra Bridge enables users to transfer Terra native tokens across supported blockchains.

  • Launchpad: StarTerra is a gamified launchpad on the Terra blockchain - that lets users invest and gain early access to new tokens and projects.

  • Payments: PaywithTerra is helping businesses around the world accept payment in Terra native tokens more easily.

  • Gambling: Fancy your chances? LoTerra offers a decentralized lottery, as well as other quick gambling games.

  • Synthetic: Mirror is a synthetic trading protocol that lets investors mint assets that mimic the value of shares on publicly traded stocks.

That’s not all either. The Terra ecosystem even includes a social ‘share to earn’ platform Valkyrie, the Angel Protocol for donations to charity, Ozone for insuring assets, and even a real estate protocol, TerraLand.

An infographic listing different protocols in the Terra ecosystem, presented by Koinly crypto tax calculator

How can I make money with LUNA?

Wondering if Terra LUNA is a good cryptocurrency to invest in now? You’re not the only one. LUNA prices have shot up from $0.22 in January 2020 to around $94 at the time of writing.

There are quite a few ways investors can make money with LUNA. For the most part, as they would with other cryptocurrencies:

  • Buying and selling LUNA with market price fluctuations.

  • Delegating and staking LUNA through Terra Station to earn staking rewards.

  • Adding TerraUSD and other stablecoins to the Anchor Protocol to earn rewards.

  • Providing liquidity to LUNA, UST, and other pools.

  • Adding your LUNA LP tokens to yield farming protocols to compound earnings.

An infographic listing different ways to make money with Terra LUNA, presented by Koinly crypto tax calculatorA caveat though - however you’re earning with Terra LUNA, the tax man wants to know about it.

Terra Taxes

LUNA, TerraUSD, and indeed all other cryptos are subject to tax, wherever you live in the world. You’ll pay either Capital Gains Tax or Income Tax depending on the specific transaction you’re making and where you live.

You’ll pay Capital Gains Tax on any profits from:

  • Selling LUNA for other fiat currencies.

  • Swapping LUNA for any other cryptocurrency - including TerraUSD.

  • Spending TerraUSD and other stablecoins on goods or services.

  • Gifting LUNA - depending on where you live.

Meanwhile, you’ll pay Income Tax on the fair market value of any crypto in your fiat currency whenever you’re seen to be ‘earning’ crypto. This could be from:

  • Rewards from staking LUNA.

  • Earning new coins or tokens through DeFi protocols.

An infographic explaining tax on Terra (LUNA), presented by Koinly crypto tax calculatorWe’ll elaborate on Terra DeFi taxes here as it all gets a little complicated. It all depends on how your specific protocol works.

If you’re providing liquidity and you receive LP token(s) in return, this is likely to be seen as more akin to a crypto to crypto trade. You don’t earn any new tokens in this instance, instead, the value of your LP token(s) increases as you collect rewards from the pool. In other words, you’ll only realize a gain when you remove your liquidity. As such, you’ll need to pay Capital Gains Tax on any profits both when you add liquidity and remove liquidity.

Meanwhile, if you’re using a protocol where you earn new tokens (often in addition to accrued interest or rewards) then you’ll pay Income Tax on these new tokens instead. You’ll need to pay Income Tax based on the fair market value (in fiat currency) of the token on the day you received it.

Even if you pay Income Tax on a token - that doesn’t alleviate you of Capital Gains Tax if you then later sell, trade or spend your tokens. Both taxes would apply.

Terra Tax Fees and Tobin Tax

Confusingly, Terra gas fees are also known as the tax rate. You’ll pay a transaction fee anytime you use the Terra blockchain to make a transaction - whether that’s to transfer, sell or trade.

There’s also the so-called Tobin Tax. This is a fixed percentage fee applied to any market swap - like swapping LUNA for UST. The fee you'll pay will vary - but the Tobin Tax exists primarily to discourage front-running.

If you’re making a transaction - like buying or selling LUNA, you could add this to your cost basis. Similarly, as the Tobin tax only applies to market swaps, this would likely be allowable as either part of your cost basis (acquisition of new crypto) or incidental (the disposal of your other crypto). As you can only add this fee once, there is a potential argument that you could apportion the fee 50/50 between the two coins that you’ve swapped.

Meanwhile, for other gas fees - like transfer fees - it’s less clear how these are viewed from a tax perspective. As you’re not forced to pay them as part of a sale, it’s unlikely you can add them to the cost basis of your asset. Moreover, as you pay Terra gas fees in crypto - this could be viewed as a spend and technically a disposal under Capital Gains Tax.

You can therefore take three approaches to deal with transfer fees from a tax perspective:

  • Realize no gain - simply reduce your holding by the gas fee amount.

  • Realize a gain in the same way as payment for goods by calculating your original cost basis and subtracting it from the fair market value of the asset at the time you spent it.

  • Realize a gain and invest that gain into remaining holdings.

The LUNA and UST crash - what to do at tax time

In May 2022, LUNA and UST crashed - with a combined loss of more than $40 billion in value. It's been a brutal time for investors and it's unclear whether the project will ever recover.

Though it's a very small silver lining in light of the scale of the losses, you can use your LUNA and UST investments to optimize your tax position and hopefully help put you in a better financial position - at least from a tax perspective.

There are a few different ways you can do this and it all depends on how Terra Labs and other involved parties decide to move forward. So let's break it down.

In most instances, you need to realize your loss from LUNA or UST before you can offset anything. This means you need to dispose of your tokens by selling, swapping or gifting them. At the moment, this is easier said than done as many crypto exchanges have delisted the pair so here are your options for disposal:

  • Sell or swap your LUNA or UST on an exchange if possible.

  • Use a native Terra wallet to swap UST/LUNA to realize a loss.

  • If you're in Australia, Canada or the UK - gift your LUNA or UST to a friend or family member. For UK investors, do not gift it to your spouse.

In the unlikely scenario that transactions on the Terra blockchain are halted permanently and you're unable to carry out a transaction to realize a loss - the tax implications from this differ depending on where you live. For investors in Australia, Canada, and the UK - you may be able to claim a capital loss. There are reasonable grounds to claim your crypto asset was destroyed and value reduced to zero - although you'll need evidence of your investments. If successful, you'll be able to claim your UST and LUNA loss as a deduction against your capital gains, based on your original cost base for your asset(s).

Unfortunately, it's not good news for US investors as they're unable to claim these kinds of losses (theft or loss) as capital losses. So US investors must realize their losses in order to optimize their tax position.

All this said, once you've realized your loss or claimed your capital loss - you'll be able to utilize them to reduce your tax bill. This works a little differently depending on where you live.

For US investors, you can offset your capital losses against your capital gains and carry forward any unutilized losses forward to future tax years. You may also offset an additional $3,000 in capital losses against your income each year.

For Australian investors, you can offset your capital losses against your capital gains and carry forward any unutilized losses. You can (and should!) strategically offset your capital losses against your short-term gains first in order to pay the lowest amount of tax possible.

For Canadian investors, as you only pay tax on half your capital gains, you can similarly only offset half your capital losses. You can however carry forward any unutilized losses to offset in the future.

For UK investors, you can offset registered capital losses to reduce your tax bill down to the £12,300 tax free allowance. If you still have leftover losses, you can carry these forward to future tax years, provided they're registered with HMRC within four years (you just need to declare them to HMRC).

A word of warning though - make sure you optimize your tax position by the end of the financial year in your country. This means you need to realize losses before the new financial year starts. This varies depending on where you live, but in summary:

  • American and Canadian investors have until the 31st of December to optimize their tax position.

  • Australian investors have until the 30th of June to optimize their tax position.

  • UK investors have until the 5th of April to optimize their tax position.

How to do your Terra taxes

Now you know how different Terra transactions are taxed, how do you calculate and report your Terra taxes?

You’ve got two options. You can do it yourself or you can use Terra tax software:

  1. Doing it yourself? You’ll need to identify each taxable transaction you’ve made on Terra. So anytime you’ve disposed of crypto by selling it, trading it, or spending it. You’ll also need to identify any income - like staking rewards. You’ll then need to calculate your cost basis for each disposal, as well as the subsequent capital gain or loss from the disposal. You’ll also need to calculate the fair market value of any tokens considered income on the day you received them in your country’s currency. Reporting requirements differ a lot from country to country. Some tax offices, like the CRA, only need to know your net capital gain or loss and the total of any additional income. Others, like the IRS, require taxpayers to report every single disposal of crypto, including your cost basis, proceeds, capital gain or loss, and the date of your transaction as a minimum. Suffice it to say, if you’re an active investor it’s a lot of work - which is why you might want to try Terra tax software instead.

  2. Terra tax software does all of the above for you. All you need to do is import your Terra transaction history using API or by uploading a CSV file of your transactions and your Terra tax software does the rest. It’ll identify all your taxable transactions, calculate your capital gains and losses, and identify the fair market value of any crypto income on the day you received it. If you’re using Koinly, you can even pick how you’d like to deal with your transfer fees from a tax perspective in settings. Once the calculations are done, just download your Terra tax report and use it to file with your tax office. We offer a variety of tax reports based on your location - for example, the IRS Form 8949 and Schedule D, the CRA Schedule 3, and the ATO myTax report.

An infographic with the Terra and Koinly logos, presented by Koinly crypto tax calculatorIf you’d like to know more about how to connect Terra and Koinly, you can see step-by-step instructions on our integration pages (including our guide on how to connect Terra Station to Koinly). But in brief - you’ll need either your Terra public address or a Terra tax CSV file.

Terra tax API

You’ll be able to find your Terra public address in the wallet(s) you use to interact with Terra. Once you’ve got it, just copy and paste it into your chosen Terra tax software and your Terra transaction data will be imported automatically. Please note, that the API for Terra is in constant development, so if you’re having trouble getting all your transaction data, you can use the Terra tax CSV method instead.

Terra tax CSV

Depending on the wallet you’re using to interact with Terra, you might be able to get a CSV file of your transaction history and upload this to your Terra tax calculator instead. Don’t worry if you can’t see an option to export your Terra transaction history - there’s a workaround. You can use a Terra blockchain explorer to export a Terra CSV file instead, then just upload this to your Terra tax calculator.

Koinly is a Terra tax tracker and calculator

In even better news, Koinly not only works as a Terra tax tracker but also as a Terra portfolio tracker. You’ll be able to see your transactions, gains, income, and even how Terra is performing overall in the wider market all from one spot.

Using other blockchains too? No worries, we support all the major blockchains, exchanges, and wallets. Just connect via API or upload a CSV file of your transaction history.

Sign up to try our Terra tax software free today.

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