I agree that this provision is a disaster and will force a lot of cryptocurrency startups to incorporate outside of the US and also not offer their services to US customers. It's a real shame. The government should be able to get enough data for tax compliance just by making fiat on-ramps and off-ramps (aka exchanges) implement KYC (know your customer) rules.
> making fiat on-ramps and off-ramps (aka exchanges) implement KYC (know your customer) rules.
That's already the case for most exchanges, and they also log trades and provide these logs to both individuals and taxation entities for EoY tax reporting purposes. The "problem" is that once you've converted fiat into crypto, you can use decentralized exchanges, and trade back and forth ad infinitum with no traceability. This is a problem because every single trade (crypto to crypto) is considered a taxable event, and on a decentralized exchange or centralized exchange that doesn't do KYC, there are no tax-specific records and therefore such transactions are unlikely to be recorded.
Many people bemoan that it would be fairer and easier to just apply tax at the time crypto is converted into, and then out of, fiat. But a lot of profit can be earnt by the individual in between those on- and off-ramps, including the potential for profits to go, pardon the pun, into the ether, never to be seen again (by the government at least).
The crypto die-hards are also moving towards the lack of necessity to cash out to fiat, which would render the off-ramp taxation less effective. This may be why there's a specific focus on stable coins, as they eschew the need for converting back to fiat.
I am the founder of CryptoTaxCalculator.io and I am not sure where the idea of non traceability on DEXs comes from. Aggregating the transaction history is absolutely possible, all we need is the public wallet address. The real black box is around certain international exchanges that don’t keep appropriate transaction records.
You're right, yes. I was attempting to point out that with a DEX there is no way to enforce record keeping or KYC, and so if someone is determined to avoid tax, then DEXs won't / can't report back to a tax authority.
Australian exchanges, as far as I've gathered, proactively send transaction details to the tax office, or are compelled to do so upon tax office request.
When it comes to public wallet addresses, it becomes up to the individual to voluntarily declare their ownership - such is my understanding.
I will defer to your knowledge and / or expertise if you disagree with my understanding, you need to know this stuff inside out - congrats on founding, and here's to a big future for crypto, you're well placed.
If you bought crypto on a regulated exchange like Coinbase, which does KYC, then it's pretty easy for the government to find out that it was you who funded the address. After that everything's an open book.
Theoretically you could claim that you were paying some other person, but then you'd have to explain what you paid for. And if you ever cash out your crypto to fiat, you'll have a lot more explaining to do.
Privacy technologies would obscure the on-chain transactions but still not help with the basic problem.
Yes, exactly this. As long as the fiat on-ramps and off-ramps are KYC'ed everything that happens in between is an open book. The individual can just use cryptocurrency tax reporting software to provide a trade history for their taxes, and if they don't do that then the IRS can easily track all of their transactions since the IRS will know what addresses they are sending to from exchanges. There's no need for every DEX (or other service) along the way to KYC their users.
