The IRS and the New DeFi Tax Software
In the United States, the Internal Revenue Service (IRS) is set to launch new software that will assist individuals in tracking their crypto transactions within the DeFi world and calculating potential capital gains or losses. This software aims to simplify tax reporting for Americans without requiring DeFi protocols to file 1099 forms.
A new bill proposed by the US Treasury Department would have mandated decentralized exchanges to provide personal user data, similar to centralized brokers like Coinbase. However, this new software could save DeFi application developers from facing such requirements, considering the unique nature of technology managing operations in this field.
The “Broker Rule” and Reporting Requirements for DeFi Platforms
The IRS’s decision to introduce the new tax management software for U.S. citizens comes after a bill proposed in August that aimed to define all decentralized services offering crypto exchange instruments as “brokers.” This would have required these platforms to provide detailed client information to the IRS.
However, this approach is impractical as DeFi protocols do not have central intermediaries with the power to control what happens on these applications. Forcing software to return detailed data of all clients conducting crypto transactions is unrealistic and could set a precedent for mandatory KYC verification.
This issue created by the recent bill could be solved by the software mentioned earlier. It would eliminate the burden on decentralized counterparties to track their clients’ data and provide it secondarily to the IRS while also helping the agency collect taxes from the growing DeFi sector.
Hot Take: Simplifying Tax Reporting in DeFi
The introduction of new tax software by the IRS could significantly simplify tax reporting for Americans engaged in crypto transactions within the DeFi world. This move addresses concerns about privacy and security while also streamlining tax reporting requirements for both users and developers in this space. With technology continuing to evolve, such solutions are essential for managing tax obligations effectively in emerging sectors like decentralized finance.
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