Taxation In The Age Of DeFi – Where To Start?

The popularity of decentralized finance continues to accelerate globally. However,it is pertinent for users to understand the tax consequences yield farming, lending, borrowing, and liquidity pools may have. Figuring out all of these aspects is crucial, yet the right tools can help one on their way relatively quickly.

DeFi And Taxes Are An Interesting Combination

Given the sheer number of opportunities to make money in the DeFi industry, many people overlook one crucial aspect. Any capital gains stemming from cryptocurrencies are likely to be part of one’s annual tax report. However, as users switch between protocols, platforms, and providers chasing the most lucrative returns on investment, it quickly becomes overwhelming to backtrack everything for taxation purposes.

For those who are unaware, DeFi taxes come in many forms. Income from lending can fall under income tax or capital gains, depending on the platform and local taxation guidelines. If users earn assets for lending the same asset, it is likely an income tax. If platform-native tokens are offered, they will often fall under capital gains. That latter aspect also applies to Liquidity Pools, as any gains from LP tokens are likely recognized as capital gains.

Even governance tokens can fit these categories. Users often receive governance tokens as an incentive for using a service or performing tasks. These tokens are subject to income tax, regardless of whether one sells them. However, capital gains tax can apply when selling tokens, either for profit or at a loss.

It quickly becomes apparent there is a significant tangled web to unfold regarding DeFi activities and taxes. There is no such thing as free money or free profit, regardless of how one wants to look at it. Even without specific guidelines in most countries regarding decentralized finance, it is often best to include everything and avoid trouble later on. However, that is much easier said than done as there is a lot of data to go through.

Streamlining The Process

Rather than forcing individual DeFi enthusiasts to figure everything out themselves, there is a golden opportunity for crypto taxation service providers. Making the filing process easier is a big step forward. Many users want to comply with taxation guidelines, even if they don’t necessarily agree with how the government sets everything up. It is a far better alternative to facing significant financial repercussions and even a potential jail sentence later on.

Thankfully, there are the necessary tools to get a headstart. Using the CryptoTaxCalculator platform will help users gain better insights into how they need to file their DeFi-related taxes, incomes, and potential losses. There is a lot to figure out, yet the platform has come up with a way to do most of the legwork on behalf of users. Users can add data from hundreds of sources – spanning exchanges, blockchains, and wallets – the tool will categorize transactions and provide the necessary tax-related details accordingly.

This approach by CryptoTaxCalculator will not only benefit experienced cryptocurrency enthusiasts. Many novices remain on the sidelines due to the sheer complexity of taxation guidelines regarding cryptocurrencies. By offering a flat-fee solution capable of automatically providing the necessary tax information, the barriers to entering the DeFi space become lower.

Closing Thoughts

No one should underestimate the tax repercussions for engaging in decentralized finance. Although there are many opportunities to make money, every form of profit – or loss – is a taxable event in most countries today. Having an option to get all of that taken care of conveniently and affordably will prove very beneficial to millions of enthusiasts globally. As more people approach the taxation of cryptocurrencies the right way, the industry will automatically gain more legitimacy. There is still a lot of negative focus on cryptocurrencies in general because they operate outside the system Solutions like Crypto TaxCalculator solve that problem in a straightforward manner and help users remain compliant with current and future taxation guidelines.

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Source: https://coinquora.com/taxation-in-the-age-of-defi-where-to-start/