Crypto Tax Filing’s Growing Relevance
The process of completing necessary documentation in which the income earned in cryptocurrency transactions over a period is calculated to determine the amount due in tax to the government could be cumbersome.
It requires getting used to, particularly as it is a new concept that is just taking off. Yet, as the industry evolves, and adoption in the space is expected to rise significantly in the next decade, the relatively new topic of crypto tax filing procedure is becoming topical.
Crypto Tax Now a Popular Talking Point
The topic is gradually gathering steam as the growth of cryptocurrency usage and users continues to strengthen in recent years and knowledge about the emerging asset class increases.
The European Central Bank (ECB) believes, for instance, that the EU investor demand for crypto-assets has been increasing despite the risks involved. Up to 10% of EU households now own these digital assets.
This rising crypto-asset demand is not limited to individuals, the Bank says, but to EU institutional investors as well as following crypto-based derivatives and securities on regulated exchanges which have increased in popularity over the last few years in Europe and the United States.
In the U.S., two senators recently introduced a bipartisan bill that could increase crypto adoption and growth, as well as help ease the stressful process of filing crypto tax. The Responsible Financial Innovation Act stipulates that crypto transactions below $200 should no longer necessitate a tax filing thus paving the way for more mini-transactions in crypto.
With this level of involvement, it’s safe to say that cryptocurrencies and other related activities like mining and transactions have thus far gained the attention of a cross-section of the public, including governments that depend on taxation as a means of raising revenue for their expenditures as well as for other purposes.
Govts keen on taxing crypto transactions
In fact, each country continues to push through with developing legislation in this regard. More countries have been instituting the mandatory but varying payment of taxes for cryptocurrency investments as the ecosystem has grown — and continues to grow — to the point of being recognised as here to stay.
There are now laws that require a user to inform tax authorities of their owning any cryptocurrency or engaged in related transactions including transmission, exchange, transfer, and collection. The practice is somewhat dominant in countries where digital assets are likened to stocks, bonds, and other capital assets.
DeFi surge stimulates crypto tax filing
With the budding decentralised finance (DeFi) concept replicating virtually everything that is possible in the existing traditional finance (TradFi) setting — lending, loans, using NFTs to create digital assets out of typically non-tradable assets, etc — it is not farfetched that governments are keen to tax crypto transactions.
DeFi is building on cryptocurrencies’ ability to enable individuals and independent groups to act as their own banks with the help of free software. With no organization in cryptocurrencies and the absence of a globally-coordinated regulatory framework, it could be just you and your friends or family members building up to be a part of a global community of the same kind.
In essence, while cryptocurrencies may be fueling a parallel digital economy — as captured essentially by DeFi — devoid of several elements that exist in the TradFi setting, the lines are blurring for these old and new systems. All the same, tax filing remains constant.
Wrapping tax filings around DeFi which is built on the use of cryptocurrency and blockchain technology could be a challenge — after all, this novel form of managing financial transactions all without intermediaries has been a great challenge to many sectors already. Nonetheless, DeFi’s ability to replicate services that banks and other financial institutions offer has not exempted its users from their tax obligations despite the digital and decentralised nature of blockchain-based initiatives.
Other factors that are likely fueling the crypto tax filing discussion
- The need and significance of being on the good side of instituted laws becoming clearer to the community. As cryptocurrencies make an inroad into the mainstream, being in line with compulsory levies imposed on individuals or entities by governments ensures the optimal use of crypto earnings particularly as the lines between TradFi and DeFi continue to blur. It saves users from defaulting and being penalised.
- This could be a result of increasing education on the need to file tax returns on crypto transactions. So far, a study shows there’s still a lack of knowledge on how to file crypto and NFT taxes. The survey by CoinTracker, a crypto portfolio tracking, and tax software company, shows that cryptocurrency investors are somewhat confused about how to complete their tax filing process. So more educational initiatives are expected to be introduced by blockchain and crypto stakeholders in the near future, making more users to be informed.
- Several new blockchain projects are tapping on the upside of DeFi, as an emerging modern technology, to add value to the conventional way of implementing financial transactions. This upgrade is set to Like at D/Bond, where we are taking what works well with bonds in TradFi — but doing away with the constraints — and putting them onto the blockchain where we believe financial assets can truly live up to their potential, we promote the need to file tax returns.
D/Bond recently partnered with Blockpit which offers compliance software for crypto-asset tax reporting. The mutually-benefiting arrangement is to enable D/Bond users to gain free access to Blockpit’s tax filing software, Cryptotax, as it is becoming more essential for the crypto community to develop a good understanding of how to process and handle their cryptocurrency transaction data for tax purposes. Blockpit’s tax software processes all crypto-related activities including trading, staking, stock tokens, and many others