⬆️Token Upgrades/Swaps

Here are three common scenarios arising for token upgrades/swaps. Let's use an example to consider the scenarios and their possible tax effect.

Token A is upgraded to a newer version of that Token (let's say Token A v2).

Airdropped upgrade

The new Token A v2 will often be airdropped via a second smart contract. The original Token A may or may not continue to exist alongside the new Token A v2.

Possible tax treatment

It is possible the acquisition cost of the original Token A should apportioned between the original Token A and the new Token A v2, pro-rata, in accordance with the market value of each token at the date of the upgrade.

If the original token becomes worthless at the date of the upgrade, then all of the acquisition cost will be moved over to the new token.

Upgrade mechanism

You are required to send the original Token A to a certain address via a second smart contract. More often than not, the original Token A will get burned (destroyed). Under the second smart contract you receive the new Token A v2.

Possible tax treatment

It is possible the acquisition cost of the original Token A will be moved over to the new token, since the original token no longer exists.

Redenomination upgrade

An alteration is made to the smart contract underlying the original Token A and it is also renamed Token A v2.

Possible tax treatment

It is possible the acquisition cost of the original Token A will be moved over to the new token, since the new Token A v2 has replaced the original Token A.

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