Changpeng Zhao got right to the point.
The Binance CEO reacted quickly to last week’s announcement by the U.S. Justice Department that a New York couple had been arrested for allegedly conspiring to launder about $4.5 billion in cryptocurrency stolen during the 2016 hack of the virtual currency exchange Bitfinex
“Crypto is easier to track than fiat,” he tweeted.
‘A Little Disheartening’
The brief statement could serve as both a warning and sound advice to taxpayers who have cryptocurrency assets but aren’t quite sure what to tell the IRS.
Accounting professionals have said that guidance from the IRS to date has been sparse, but it indicates that most crypto, including NFTs, are to be treated as property and not currency for federal income tax purposes.
One person posting on Reddit said that “filing taxes for crypto makes me not want to trade crypto.”
“I used a lot of different exchanges and within each exchange did quite a few trades,” the poster said. “Having to go through each exchange, go through all the history, figure out the cost basis is kinda a pain, and now having to go back through all of it makes me not want to trade.”
The poster added that “Yes, it was nice making some money (and losing some lol), but after going through all this work only to pay the Gov more money that they will just misuse is a little disheartening.”
Another poster on Reddit commented that “Crypto is gambling not investing.”
“There should never be a tax on crypto,” the poster said. “You pay tax on uniswap and pancake swap etc . Crypto is one of the highest taxed items it is ludicrous!”
“Need some help with my crypto taxes in 2022,” one person posted on Reddit. “Between all of the numerous exchanges that I’ve used, I had hundreds of transactions.”
“The amount of work involved is mind-boggling,” one poster responded. “Almost no one, I’m sure, reports it appropriately…. Even if they truly understand what they’re doing and are reporting truthfully.”
“It boggles the mind how mind boggling it is,” another said.
Centralized vs Decentralized
Tax professionals said that people should be aware of the implications and considerations of centralized and decentralized crypto exchanges.
In a centralized exchange, a third party monitors the transaction and secures the assets on behalf of the buyer and the seller. A decentralized exchange allows the users to control their crypto funds and does not have a third-party set up.
“From a tax standpoint, swapping one cryptocurrency for another cryptocurrency is a taxable event – it does not matter if the swap is undertaken using a centralized or decentralized platform,” said Josh Tompkins at KPMG. “It should be noted, however, that both centralized and decentralized exchanges frequently allow users to engage in other types of transactions where the tax treatment is much less settled–this is probably somewhat more prevalent in the decentralized context.”
Tompkins added that centralized exchanges typically have some form of information reporting currently in place and it is relatively clear that they will be considered “brokers” required to provide cost basis information to customers for digital assets acquired after January 1, 2023.
“On the other hand, decentralized exchanges for the most part do not have a robust information reporting architecture in place and it is not yet clear that they will be considered ‘brokers’ subject to formal information reporting requirement,” he said
Centralized exchanges may have an advantage in that they tend to provide more information that might help their users comply with their tax obligation, Tompkins said.
However, he added that “this advantage is somewhat mitigated by the availability of software programs that aggregate transactions undertaken by a taxpayer across centralized and decentralized exchanges and use this information to produce tax reporting forms.”
“From a tax planning standpoint, centralized exchanges sometimes help their customers implement tax loss harvesting strategies to lower their tax bills,” he said. I have not seen a similar service offered on decentralized platforms.”
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