The DeFi (Decentralized Finance) industry has been on an upward trajectory for the past few years, and it is expected to continue its growth in the coming years. However, with the development of this industry, there are also significant changes taking place in the taxation sector, and DeFi operators need to be prepared for these changes. In this blog, we'll discuss the top five things that DeFi operators need to know in the tax year 2023.
- Definition of Cryptocurrency and DeFi Assets
The first thing that DeFi operators need to understand is the definition of cryptocurrency and DeFi assets. The Internal Revenue Service (IRS) has defined cryptocurrency as a form of property, which means that it is subject to capital gains tax when sold or traded. This also applies to DeFi assets, including stablecoins, tokens, and other crypto assets.
- Reporting Requirements
DeFi operators are required to report their cryptocurrency and DeFi assets to the IRS. This includes reporting the purchase, sale, and exchange of these assets, as well as the number of capital gains or losses that have been incurred. DeFi operators need to be aware of the reporting requirements for their specific country, as the reporting requirements may vary from one country to another.
- Taxation of DeFi Transactions
DeFi transactions, such as borrowing and lending, are also subject to taxation. DeFi operators need to be aware of the tax implications of these transactions, and they should seek professional advice to ensure that they are following the correct tax laws.
- Record Keeping
DeFi operators must keep detailed records of all their DeFi transactions, including the purchase and sale of cryptocurrency and DeFi assets. This includes keeping track of the cost basis of each asset, as well as the date of the transaction. These records will be needed when preparing the tax returns, and they can also help DeFi operators to avoid any potential penalties.
- Tax Credits and Deductions
DeFi operators may also be eligible for tax credits and deductions, depending on the specific circumstances of their business. For example, they may claim deductions for business expenses, such as the cost of computer equipment and internet service. DeFi operators should seek professional advice to ensure that they are taking advantage of all the tax credits and deductions that are available to them.
In conclusion, the Decentralized Finance industry is expected to continue its growth in the coming years, and DeFi operators need to be prepared for the changes that are taking place in the taxation sector. By understanding the definition of cryptocurrency and digital assets, the reporting requirements, the taxation of DeFi transactions, the importance of record keeping, and the tax credits and deductions that are available, DeFi operators can ensure that they are following the correct tax laws and avoiding any potential penalties.