Tax Information for Breakout Traders

Participating in the Breakout program may have tax consequences, particularly when you receive a payout.

Breakout is a proprietary trading program. After successfully completing an evaluation and qualifying for a Breakout account, you are able to trade using a Breakout-provided account rather than depositing your own trading capital. If your trading performance meets the applicable requirements, you may become eligible to receive a payout.

The tax treatment of Breakout differs from trading crypto with your own funds.

No.

When you trade through a Breakout account, you are not purchasing and selling crypto assets that you personally own using your own trading capital. The trading activity is conducted through the Breakout program using Breakout-provided funding.

As a result, the individual trades you make within the Breakout program are not treated in the same manner as purchases and sales of crypto assets in your personal Kraken account.

Instead, the primary tax-relevant event for a Breakout participant is generally the payout received from the Breakout program in USDC.

Your specific tax treatment may vary depending on your country of tax residence, your individual circumstances, and how your local tax authority characterizes income from proprietary or performance-based trading programs.

Breakout payouts may constitute taxable income.

Depending on the tax rules applicable to you, the value of the USDC you receive as a Breakout payout may be treated as income at the time you receive it.

Breakout payouts are paid in USDC, a stablecoin designed to closely track the value of the U.S. dollar (USD). As a result, the value of a USDC payout will generally be expected to closely approximate the equivalent amount in U.S. dollars. However, USDC is a crypto asset and its market value may not always be exactly equal to one U.S. dollar.

If your domestic or tax reporting currency is not USD, you should also consider the value of the USDC payout in your applicable domestic currency at the time the payout is received. For example, a taxpayer whose reporting currency is EUR, GBP, CAD, or another currency may need to convert the value of the payout into that currency using the exchange rate required under their local tax rules.

How the payout is ultimately classified for tax purposes can vary by jurisdiction. Depending on the applicable rules and your individual circumstances, a payout may be treated as business income, self-employment or services income, other income, or another category.

You should discuss the appropriate valuation method, exchange rate, and tax treatment with a qualified tax advisor familiar with the rules applicable in your jurisdiction.

Yes, if required.

Breakout payouts may be subject to tax information reporting, including CARF/DAC8 reporting and Form 1099-MISC reporting for U.S. users.

CARF and DAC8 reporting

Where applicable, Breakout payouts made in USDC will be included in CARF/DAC8 reporting for reportable users.

Information relating to your Breakout payout may therefore be reported to the applicable tax authority and, where required, exchanged with the tax authority in the country or countries where you are tax resident.

CARF and DAC8 are tax information-reporting regimes. The reporting of a Breakout payout does not determine how much tax you owe or how the payout should be characterized on your tax return.

Your local tax obligations may also require you to determine the value of the reported payout in your domestic or tax reporting currency.

U.S. tax reporting — Form 1099-MISC

For U.S. users, reportable Breakout payouts will be reported on Form 1099-MISC.

Where the applicable reporting requirements are met, Kraken will issue a Form 1099-MISC reflecting the reportable value of your Breakout payouts and will report that information to the Internal Revenue Service (IRS).

Because Breakout payouts are made in USDC, the amount reported on Form 1099-MISC will reflect the applicable U.S. dollar value of the payout for tax reporting purposes.

Importantly, the Form 1099-MISC relates to the Breakout payout you receive, rather than the individual trades you make within your Breakout account.

The underlying Breakout trading activity is therefore not treated as a series of personal crypto purchases and sales by the participant for Form 1099 reporting purposes. Instead, the relevant reportable event is the USDC payout from Breakout.

Receiving or not receiving a Form 1099-MISC does not, by itself, determine whether an amount is taxable. U.S. taxpayers remain responsible for accurately reporting taxable income on their federal, state, and local tax returns, as applicable.

Once a Breakout payout is credited to you in USDC, you should retain records showing:

• the date and time you received the payout;

• the amount of USDC received;

• the value of the payout in your domestic or applicable tax reporting currency when received, where relevant; and

• any subsequent sale, exchange, conversion, transfer, or other disposition of the USDC.

Because USDC is a stablecoin designed to closely track USD, fluctuations between USDC and USD will typically be expected to be relatively limited. However, the value of USDC relative to your domestic currency may change as foreign exchange rates move.

For example, even if the value of USDC remains close to USD, the value of a USDC payout expressed in EUR, GBP, CAD, AUD, or another currency may be different on the date you receive the payout because of movements in the exchange rate between USD and your domestic currency.

The value of the USDC when received may be relevant both to determining the income associated with your Breakout payout and to establishing the tax basis or acquisition value of the USDC you received.

A subsequent transaction involving that USDC may create a separate tax consequence. Accordingly, the receipt of a Breakout payout in USDC and a later sale, exchange, or other disposition of that USDC should be considered separately for tax purposes.

The tax treatment of fees you pay to participate in a Breakout evaluation depends on your individual circumstances and the tax rules applicable in your jurisdiction.

In some circumstances, expenses associated with earning taxable income may be treated differently from personal expenses. Kraken and Breakout cannot determine whether an evaluation fee is deductible or otherwise eligible for a particular tax treatment for an individual customer.

You should retain records of any evaluation fees you pay and discuss their treatment with your tax advisor.

No.

Kraken and Breakout do not provide tax, legal, or accounting advice. Tax laws vary significantly between jurisdictions, and the treatment of proprietary trading payouts is not necessarily the same as the treatment of gains or losses from trading crypto assets that you personally own.

You should discuss your participation in Breakout, any evaluation fees you pay, the USDC payouts you receive, the value of those payouts in your domestic currency, and any applicable tax reporting with a qualified tax advisor who is familiar with the tax laws applicable to you.

You remain responsible for determining your tax obligations and accurately reporting any income, gains, losses, or other amounts required by your local tax authority.