March 27, 2024
DeFi Under Scrutiny: US Tax Authorities Face Challenges in Regulating DeFi
Policy & Regulation

DeFi Under Scrutiny: US Tax Authorities Face Challenges in Regulating DeFi

According to Coinbase’s chief tax attorney, it would be “awfully challenging” for American tax authorities to investigate the decentralized finance sector.

Lawrence Zlatkin, Vice President of Tax at America’s largest cryptocurrency exchange, said that a proposal from the Department of the Treasury and the Internal Service Revenue (IRS) to target crypto exchanges is eventually unworkable.

When discussing the new regulations put forth by the Biden Administration earlier this year, Zlatkin claimed that gathering data from DEX users would be challenging.

“It’d be challenging to do that with them being peer to peer,” he stated. “Let’s forget whether they shouldn’t be—how they would is an open question as well.”

In the end, he asserted that when it comes to keeping track of profits and losses for investors and traders, decentralized exchanges (DEXs) shouldn’t be singled out.

“I don’t think a decentralized, peer-to-peer private network should be treated differently,” he stated.

Following a letter, he wrote last week asserting that the US government has an “overarching expansive view” of collecting gains on taxes, Zlatkin made these remarks. The idea was characterized by him as “unprecedented, unchecked and unlimited tracking on the daily lives of Americans.”

Leading cryptocurrency exchanges might soon be required by the Biden Administration’s regulations, which alarmed prominent figures in the cryptocurrency industry and several politicians, to provide client information to the IRS. By focusing on what American taxpayers earn from their investments, the proposal seeks to “close the tax gap”.

As part of the plan, new regulations would ask digital asset platforms that enable the buying and selling of cryptocurrencies to track and report essential information, similar to how it is presently done with stock and bond brokers. This would change how the concept of a “broker” is defined.

Therefore, DEXs like Uniswap would likewise be a target of the proposed regulations.

A significant portion of the DeFi market is made up of DEXs, which, in contrast to centralized exchanges like Coinbase or Binance, let users trade digital currencies and tokens without having to register or provide personal information like a name, address, or official identification.

Some people in the DeFi community are alarmed by the idea of targeting DEXs.

The planned “broker” rulemaking “must be stopped,” according to Defi Education Fund, a nonprofit organization based in Washington, D.C., since it would “raise serious tax policy and privacy concerns.”

Image: Freepik

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