Christopher Ferguson and Michael Waalkes write in a recent CPA Journal article about the increased popularity of decentralized finance (“DeFi”) and the complicated tax issues triggered by DeFi activity.
DeFi is a blockchain-based, peer-to-peer system that is used for conducting financial activity without the need for third-party intermediaries or financial institutions. As Chris and Michael explain, “Unlike centralized [cryptocurrency and digital asset] exchanges, such as Binance and Coinbase, DeFi protocols are typically barebones, if not entirely automated, operations without traditional know-your-customer (KYC) protections and tax information reporting requirements.” Chris and Michael go on to explain that the uncertain and rapidly evolving regulatory landscape around DeFi gives way to traps for the unwary when it comes to tax compliance.
The article outlines three common elements of DeFi activity that may raise challenging tax compliance issues: (1) liquidity pool transactions; (2) flash loans; and (3) interactions with decentralized autonomous organizations (“DAOs”). In the article, Chris and Michael explain each of these phenomena, which are unique to DeFi, and the tax reporting issues presented by each.
Chris and Michael conclude the article with a word of caution to tax professionals whose clients are engaged in DeFi activities, emphasizing the need for vigilance in understanding and monitoring developments in this fast-growing part of the economy and the law.
Read the full article here.
About Chris
Chris has over two decades of experience as a litigator, concentrating his practice on white-collar criminal defense as well as civil tax controversies, criminal tax fraud, and other regulatory enforcement matters. Chris also has extensive experience handling complex civil litigation and internal investigations.
About Michael
Mike focuses his practice on civil and criminal tax controversy matters. Prior to joining the firm, he served for two years as a judicial law clerk for Judge Joseph W. Nega of the United States Tax Court. Mike received his J.D. and LL.M. in taxation from Boston University School of Law.
