Tax reporting, compliance and DeFi, oh my!
Two weeks ago, The Financial Accounting Standards Board (FASB) agreed to take up a new review of accounting and disclosure standards for digital assets. The blockchain industry hailed it as a needed addition to FASB’s “technical agenda” and an indication of further acceptance of what the standards board calls “plain vanilla” cryptocurrencies – Bitcoin and Ether.
At last week’s Permissionless conference, Miles Fuller, a former IRS employee and current Head of Government Solutions for TaxBit, echoed industry frustration with today’s reporting standards saying in a discussion with Chamber of Digital Commerce’s Perianne Boring, “You need your balance sheet to be a full reflection of reality.”
As late as October 0f 2020, the not-for-profit accounting standards board, which guides all publicly traded companies such as digital asset holders Tesla and MicroStrategy, said that if the value of Bitcoin goes down, for example, a company must record the decrease in assets on its balance sheet on an annual basis. But if it goes up, the same companies only get to record a gain if the assets are sold.
TaxBit’s Fuller expanded the reporting pain point to the IRS and its intersection with decentralized finance (DeFi) noting how – as a former insider at the IRS – the agency was close to providing guidance to consumers on tax compliance with digital assets, but then Congress got in the way. Fuller added, “Sometimes I hear people put the onus on the IRS, but it’s Congress – the IRS is just trying to administer it.”
DeFi, in particular, presents a host of tax reporting and compliance challenges, according to Fuller, who noted two main challenges:
“The first problem we have in my mind is a definitional problem.
I can say ‘staking’ and could probably pull [definitions from] five people who all have different definitions.
Then the second problem is around new situations that existing laws don’t apply to. A good example of this in the tax realm is lending. On a DeFi protocol when you go drop something on Uniswap and put it in a liquidity pool -everyone says you’re lending and that it should be taxable. But technically, you’re not lending – you’re actually giving up ownership of your assets which would for tax purposes be a disposition. And then people say, ‘When I lend out my stock that’s not taxable.’ Yeah, but there’s an actual statute which Congress passed that says stock which meets certain parameters is not taxable.”
Know-Your-Customer (KYC) and Anti-Money-Laundering laws were also touched on by Fuller and Chamber of Digital Commerce’s Boring which included a heads up on how DeFi may be regulated by the U.S. government in the future. Boring said, “Regulation is going to fundamentally change the infrastructure of the DeFi ecosystem. Tax is one area, but there are others like AML Compliance, that will be another. The DeFi industry that we know today is going to look very different because of what’s happening in the policy community right now.”
Also of note from the Permissionless discussion, and coming out of the infrastructure bill debate, there was a perception of some in Congress that they needed to close the “tax gap” with crypto owners. This inherently suggested that crypto is comprised of a community of tax evaders. Boring said that it has been quite the opposite and the call for guidance from the IRS and policymakers has been long and loud. Fuller added regarding the so-called tax gap that it should be about making it simpler: “I like to think [the tax gap] isn’t totally about people who are nefarious. It’s the difference between the amount which is being recorded and the amount to which people are innocently mistaken.”