2019's DeFi Boom Creates New Questions for Tax Filing Season

TaxBit co-founders Justin and Austin Woodward, image courtesy of TaxBit.

The decentralized finance boom of 2019, leading to over $785 million in locked crypto assets, is already making accountants dizzy.

If you lock up bitcoin or ether in exchange for a synthetic asset or a stablecoin, as nearly a dozen projects and platforms today allow, is that a trade or merely a temporary reorganizing of the original asset?

That's why firms such as Dragonfly Capital and Winklevoss Capital, the latter of which is owned by Tyler and Cameron Winklevoss of the Gemini exchange, invested $5 million in startups like TaxBit.

TaxBit CEO Austin Woodward said so far "Thousands" of users have signed up for the 2020 tax season, including a few exchanges.

Dragonfly Capital co-founder Alex Pack said connecting automated software to an exchange account could create additional privacy risks, in the case of a cloud breach, which is why the firm invested in TaxBit's experienced team.

Because there's no clear categories for the experimental assets, prudent DeFi users record everything from wallet addresses to open source code links in case the IRS comes knocking.

"We're releasing a lot of functionality around tax optimization. Recommending trades that could give users the most beneficial tax answer."

Woodward said DeFi users that used MakerDAO loans and other financial products beyond exchanges need to enter transaction details manually, relying on support from TaxBit's chat hotline with tax attorneys and CPAs.

As for Cryptio, which is strictly focused on serving businesses and doesn't offer a TurboTax-style option for retail users like TaxBit, Scalia said his team is helping clients that used DeFi products to record information related to every smart contract the asset touched along the way.