Cryptocurrencies are treated like property for tax purposes. This means that any transactions involving them are subject to capital gains tax, just like any other investment. This includes buying and selling cryptocurrencies and using them to buy goods or services.
Hence, individuals and businesses must maintain precise crypto transaction dates and value records. Failure to compute tax liability to disclose cryptocurrency transactions or pay taxes on gains can result in penalties or legal repercussions. Does this bring up a crucial issue regarding your crypto assets?
Authorities Monitor Your Cryptocurrency
Although decentralised finance (DeFi) protocols and self-custody wallets can offer some level of privacy, it does not imply that transactions are entirely concealed from tax authorities. Tax authorities can use various tools and technologies to keep track of public blockchain networks like Ethereum, which are often used for DeFi transactions.
Several tax authorities worldwide are investing in blockchain analytics tools to help them recognise and trace individuals who are not reporting their crypto transactions. If a user trades crypto for government-issued currencies like USD, EUR, or GBP, the transaction may have to be reported under anti-money laundering (AML) and know-your-customer (KYC) regulations.
— CEX.IO (@cex_io) January 6, 2023
Depending on the rules in their country, crypto users may have to report their transactions to tax authorities. It’s important to note that all activities regarding crypto transactions are public, and on-chain data reveals activities through transactions recorded on blockchain networks.
17/ It’s the identity problem in DeFi that regulators care about
Which I think can and will be addressed by privacy preserving identity protocols that use zero-knowledge proofs
Prove facts about yourself without actually revealing these facts on-chain for everyone to see
— ChainLinkGod.eth (@ChainLinkGod) July 2, 2022
Connect the Dots
On-chain data is the information recorded on a blockchain, which serves as a public ledger of all network transactions. As the blockchain is decentralised and incapable of modification, it’s feasible to employ data-matching algorithms to scrutinise and connect various pieces of information on the blockchain, such as asset ownership and digital tokens.
In certain instances, the owners of cryptocurrency addresses can be detected using this on-chain data, potentially exposing their privacy and anonymity. Because of this, users must be aware that on-chain data is public and take the right steps to protect their privacy.