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Navigating the complexities of DeFi Taxes
Do you know how to file DeFi taxes? This week, we uncover the greatest challenges (and best practices) for reporting DeFi transactions.
Today’s read is all about the challenges of calculating tax liabilities for DeFi transactions.
But first, some quick housekeeping:
After talking to many in our growing community, I've noticed a prevailing theme: we are all trusted advisors for crypto organizations. Taking this into account, I decided to rebrand as CryptoAdvisors.
Ultimately, CryptoAdvisors better reflects my goal to educate experts who are shaping our industry.
With that said, let’s get into today’s topic.
This Week’s Topic
🏦 Navigating the complexities of DeFi Taxes
There was an explosion of activity in Decentralized Finance (or DeFi) in 2020-21, but there are many challenges with understanding and reporting on taxable gains and losses for DeFi transactions.
Accountants that work heavily with DeFi struggle to keep up.
Why it matters: Crypto taxes are already difficult, but DeFi taxes take it to a whole other level. With so many different types of transactions across various blockchains (liquidity pools, vaults, bridges, wrapped assets, etc.), interpreting this data can be extremely challenging.
As tax season ramps up, accountants will want to learn how to account for these transactions to help their clients.
So what are the greatest challenges with DeFi taxes currently?
Lack of clarity from the IRS or FASB: The IRS has yet to provide comprehensive guidance on the tax treatment of DeFi transactions. This has led to confusion and uncertainty for individuals and businesses conducting DeFi transactions, as they are unsure of how to report and pay taxes.
Lack of standardization: The DeFi ecosystem is fragmented across many different protocols, blockchains, and standards. This makes tracking and reporting on taxes consistently across different platforms a complex endeavor.
Complexity: A single DeFi transaction can involve multiple token movements, making it challenging to track and report on the tax implications of each movement with accuracy.
Evolving technology: DeFi is constantly evolving, and new protocols and platforms are being developed all the time. This makes it difficult for regulators and institutions to keep up with the pace of change and provide updated guidance.
However, as the industry has matured, there are some best practices and solutions for you to better account for DeFi with confidence:
Stay up to date on the latest regulation and clarity from institutions or track previous cases for the newest precedent on tax law. Subscribe to newsletters like this one.
Find other expert crypto tax professionals to learn from, whether on social media or through newsletters like this one. You can also find others to work with through our Crypto Accounting Partner page.
Get your feet wet by experimenting and using various DeFi protocols yourself to gain an understanding of how these transactions work.
Use reliable DeFi accounting software to track and streamline your financial reporting, making it easier for you to accurately report on tax obligations.
Bottom line: Although DeFi taxes are a major challenge for crypto accountants, they also create an opportunity to develop a lucrative niche within the industry. Most importantly, as a DeFi-specialized accountant, you are in short supply with high demand from DeFi services, meaning you will always have clients to work with.
📚 What We’re Reading
NFTs, stablecoins, and issuers of new crypto tokens excluded from the FASB Crypto Accounting Plan
On Wednesday, FASB confirmed its position that businesses could use fair-value accounting for bitcoin and other crypto assets. However, this new ruling will not apply to the issuers or creators of new crypto tokens, wrapped tokens, NFTs, or stablecoins. The FASB aims to have a formal proposal ready for public feedback by late March.
The Status of Proof of Reserve in 2022
Proof of Reserves and on-chain accounting have been an important topic of discussion since the FTX debacle. Nic Carter answers lingering questions around PoR, digs deep into the recent attempts, and provides a framework for how to judge their effectiveness.
Handling crypto losses on your 2022 tax return
2022 was a tough year for crypo and there’s a good chance you have losses to report. Learn about what you need to do to claim losses on your tax return this year.
Listen & Learn
🎧 How to file DeFi Taxes with Cameron Browne
Want to learn more about DeFi taxes from someone who’s deep in the trenches?
Listen to our latest Decentralized Ops podcast where I sit down with Cameron Browne, CPA. Cameron is a Partner at Darien Advisors — a firm focused on crypto accounting for activities like DeFi, NFTs, and mining or validating.
Some key takeaways:
How Cameron handles challenges with the complexity of accounting for DeFi transactions
Why he works with a crypto tax law firm to understand the precedent behind crypto accounting treatment
Examples of various DeFi tax cases he's worked on with clients, including liquidity pools, wrapped assets, and running validators
Why he recommends getting your feet wet with DeFi platforms yourself as an accountant
The differences between crypto taxes for individuals versus businesses
Cameron's predictions for the crypto space over the next year, including major consolidation.
Work in Web3
👾 Web3 Accounting Job Alert
Nansen, a crypto analytics platform backed by a16z, is hiring an FP&A Manager to help the company grow and make better financial decisions.
It’s crypto tax season, do you know where your expense data is?
Pull all of your expense transactions in one place, filtered by counterparty. Get out of “data wrangling” work and into the “valuable insights and analysis” work that you deserve.
That’s all I’ve got for this week. If you found today’s newsletter useful, feel free to share it with your friends and colleagues.
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This newsletter is strictly for informational purposes only and does not constitute financial, investment, or tax advice. As always, do your own research.
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