How to categorize ENS (Ethereum Name Service) bids?

I bid on some Ethereum Name Service domains names (eg accointing.eth).

This process required:

  1. placing bid
  2. waiting to see if you won
  3. if you won, you got some money returned (your bid - second highest bid)
  4. if you lost, you got your whole bid returned
  5. a year later they returned all winning bid ETH and switched to a pay by year system

How should I categorize 1,3, and 4?

My hunch is to label them as internal transactions as the funds lived in a smart contract until I won or lost the auction.

Exactly. That is correct. You didn’t generate a taxable event until you received the money back.

How is receiving the money back a taxable event? That still the original funds in the original currency.

  1. placing bid (Withdraw-Payment)
  2. if you won, you got some money returned (your bid - second highest bid) (Income-Add Funds)
  3. if you lost, you got your whole bid returned (Deposit-Add Funds

It might be the original funds in the original currency but the price changed, generating a gain/loss over time.

I think I’m missing something.

In your scenario:

  1. I bid 1 ETH at $2000/ETH (withdraw-payment)
  2. I win and the second highest bid is .5 ETH at $2000/ETH.

In the simplest scenario, price of ETH stays the same.
I get $1000 of ETH (income-add funds)

That $1000 then gets income tax (24%).
So $240 income tax?

This does not seem correct. What am I missing?

it sounds like you need a custom wallet to support that feature. you can do so in the following steps:

  1. Create an Ether wallet without an address, and call it “Ethereum Name Service” or something similar.

  2. Create a manual deposit into that wallet with the same amount and timestamp as the withdraw from your original wallet.

  3. Classify them as being internal transactions.

Then do the following based on your case:

  • Lost Bid - make a withdraw from that wallet back to the original wallet and mark it as internal. No Tax Implications.

  • Won Bid - make a withdraw of the coins refunded back to the original wallet and mark it as internal. Then make a withdraw of the coins spent on the transaction and mark it as “Payment”. Pay Tax only on the purchase price listed as “Payment”.

I’m not 100% sure on how to classify this since it was not in the same tax year. if it was in the same tax year then you could just modify the payment made to reflect only what you actually paid and any remainder make another internal transfer back to your original wallet.

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