According to Dan Howitt of crypto tax service provider Recap, people should be able to pay taxes pseudonymously. Cryptocurrency investors can protect themselves from collapses of major cryptocurrency companies by holding their own cryptocurrencies. Several regimes are working on new decentralized financial tax regulations that provide investors with enormous returns.
The collapse of major crypto companies last year made investors realize the harsh reality of cryptocurrency custody. Not only did customers lose access to their cryptocurrencies on the exchanges when they failed, but investors also became responsible for complying with tax laws overseen by the Internal Revenue Service (IRS) even though they did not possess the keys to their cryptocurrencies.
Just a few weeks ago, the US Treasury Department proposed new laws to detect crypto tax evaders and make it easier for compliant citizens to file returns. Under the tax bill, exchanges must report gross revenue from transactions. Later, they would have to report the cost basis, or how much customers paid for the assets they later sold. The difference between the investor’s cost base and the price at which he sold the assets would constitute taxable income.
Despite their best efforts, investors who hold cryptocurrencies in non-custodial wallets have historically faced nightmares trying to track profits that span multiple decentralized finance (DeFi) applications. Having service providers help track transactions isn’t always helpful, as different providers can present wildly different results, says tax expert Clinton Donnelly.
Crypto Investors Can Use Self-Custody Until It Comes into Effect
It is important to start balancing the need for disclosure with the privacy that cryptocurrency enthusiasts crave. This is according to the CEO and co-founder of crypto tax software company Recap, Dan Howitt.
Additionally, it is essential to educate users on how to set up their crypto self-custody, which, for the most part, has proven too daunting, leading investors to give up autonomy for the sake of usability.
Tracking profits and losses can also require a lot of work, although self-custody is the only way to preserve cryptocurrencies’ censorship-resistance goals and protect against future crashes, according to Howitt.
With more education, self-custody can help clients obey crypto tax laws without revealing sensitive information. But first, an introduction to why DeFi transactions are so difficult to trace.
Regulators Could Force Data Collection in Case of Noncompliance
Danny Chong, CEO of Tranchess, a DeFi yield platform, recently told BeInCrypto that DeFi needs regulations to shape its future. But is the delivery of private information the price we have to pay?
The proposed US Crypto Asset National Security Enhancement Act of 2023 requires parties that control or have invested in a DeFi protocol to collect customer information. It would also give the Treasury additional powers to pursue money laundering carried out outside the traditional financial system.
International anti-money laundering bodies, such as the Financial Action Task Force (FATF), recommend anti-money laundering rules that European Union regulators saw fit to include in their cryptocurrency legislation, the Currency Markets Bill. Cryptoassets (MiCA).
MiCA, which will go into effect in 2024, requires exchanges to register parties on both ends of the transaction. It will do so regardless of the amount exchanged.
Nevertheless, until MiCA and other laws come into effect, it’s unclear how popular the service will be. From a technical point of view, Recap could theoretically be affected by changes to the Ethereum blockchain.
By Audy Castaneda