The Reality of Crypto Custody: Protecting Your Assets and Paying Taxes
Last year, the collapse of major crypto firms highlighted the importance of crypto custody and the challenges it poses for investors. Not only did customers lose access to their crypto when exchanges failed, but US investors also had to navigate complex tax laws enforced by the IRS, even if they didn’t have control over their crypto keys.
Recently, the US Treasury Department proposed new tax laws to catch crypto tax evaders and simplify tax filing for law-abiding citizens. These laws require crypto exchanges to report transaction proceeds and the cost basis of assets sold. The difference between the cost basis and the selling price would be taxable income.
However, investors using non-custodial wallets have faced difficulties tracking gains across multiple decentralized finance (DeFi) applications. Different service providers offer inconsistent results, making it challenging for investors to keep track of their transactions.
US Crypto Investors Have Time Before Taxes Are Implemented on DeFi Profits
For now, US DeFi investors are not subject to taxes on their profits. The government plans to start taxing DeFi profits in a few years. Despite this grace period, it’s important for investors to balance the need for disclosures with the privacy they desire.
Decentralized finance transactions are difficult to track because they operate without intermediaries. These platforms enable peer-to-peer exchanges of crypto assets using special code, independent of regulatory rules. However, regulators are concerned about the pseudonymity of these transactions.
Regulators Could Require Data Collection for Crypto Tax Compliance
Regulations may require parties involved in DeFi protocols to collect customer information. The surrender of private information could be a necessary price to shape the future of DeFi. Anti-money laundering rules recommended by international bodies may also be included in crypto legislation, requiring exchanges to record transaction parties.
Preserving crypto anonymity while fulfilling tax obligations is possible through services like Recap. They track transactions through integration with Ethereum, the largest DeFi blockchain. However, the success of such services may depend on wallet providers and potential changes to the blockchain.
Hot Take: Balancing Privacy and Compliance in Crypto Custody and Taxation
As the crypto industry continues to evolve, the conversation around custody, privacy, and taxation becomes increasingly important. Self-custody provides control over funds, but it also comes with the responsibility of managing tax obligations. Services like Recap offer a solution by tracking transactions while preserving anonymity or pseudonymity.
However, the implementation of new tax laws and regulations may impact the effectiveness of such services. It is crucial for investors to stay informed about the changing landscape and find a balance between privacy and compliance.
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