Taxes Targeting DeFi Would be ‘Awfully Challenging’: Coinbase VP

The decentralized finance industry would be “awfully challenging” for American tax authorities to survey, Coinbase’s top tax lawyer has said.

A proposal from the Department of the Treasury and the Internal Service Revenue (IRS) to target crypto exchanges is ultimately impractical, Lawrence Zlatkin, who is Vice President of Tax at America’s biggest cryptocurrency exchange, told Decrypt. 

Talking about new rules proposed by the Biden Administration earlier this year, Zlatkin said that collecting information from DEX users would be difficult.

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

Ultimately, he said decentralized exchanges (DEXs) shouldn’t be singled out when it comes to tracking gains and losses for traders and investors.

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

Zlatkin’s comments come following a letter he penned last week saying that the U.S. government has an “overarching expansive view” about collecting gains on taxes. He described the proposal as an “unprecedented, unchecked and unlimited tracking on the daily lives of Americans.”

Top cryptocurrency exchanges may soon have to report customer information to the IRS under the rules proposed by the Biden Administration earlier this year—which have rattled crypto big wigs and some lawmakers. The proposal aims to “close the tax gap” by targeting what American taxpayers make from their investments. 

As part of the proposal, new rules would revise the definition of a “broker” by asking digital asset platforms that facilitate the buying and selling of crypto to track and report key information—which is currently how it works with stock and bond brokers. 

Crypto Taxes in the US: Introduction

Love them, tolerate them, or hate them, taxes are a part of everyday life for nearly everyone in the modern world. In addition to the sales tax, property tax, and income tax, you also have to pay a tax on profitable investments — and this includes cryptocurrency. In this article (and the following ones in this series), we’re going to cover U.S. tax laws at the national level. If you’re buying and selling crypto in another tax jurisdiction, you’ll have to check your local laws on crypto taxes. M...

The proposed rules would therefore also target decentralized exchanges (DEXs) like Uniswap. 

DEXs are a big part of the DeFi industry; unlike centralized exchanges like Coinbase or Binance, they allow users to trade digital coins and tokens without signing up and giving personal information like a name, address, or providing a government ID. 

The proposal targeting DEXs has rattled some in the DeFi world. 

Today, Washington, D.C. nonprofit Defi Education Fund said on Twitter that “the proposed ‘broker’ rulemaking… must be stopped” because it would raise “serious tax policy and privacy concerns.”

Edited by Ryan Ozawa.