Coinbase VP Warns Taxing DeFi is Impractical

Tax vice president at US leading crypto exchange Coinbase, Lawrence Zlatkin, warned that implementing the proposal to change the taxation rule targeting decentralized finance is awfully challenging. The executive downplayed the Treasury and Internal Service Revenue (IRS) suggestion to survey and track daily American lives into decentralized finance. 

Coinbase Executive Consider Tracking Decentralized Finance Challenging

Coinbase’s lead tax lawyer admitted that the IRS authorities would find surveying the decentralized finance industry awfully challenging. Zlatkin weighed on the new rules fronted by President Joe Biden’s administration at the onset of 2023. The top executive at the world’s second-largest crypto exchange illustrated that harvesting information from decentralized exchanges (DEXs) users is difficult.

Tracking DEX-based transactions is challenging, considering that the majority are peer-to-peer. Zlatkin advised that the proposal is unviable on how well to implement in a highly decentralized climate. 

Zlatkin admitted that decentralized exchanges and peer-to-peer networks should be exempted from tracking the gains and losses realized by traders and investors for tax purposes. 

Zlatkin’s pronouncement on the impractical nature of taxing decentralized finance (DeFi) comes after his letter criticizing the US government’s expansive view on collecting taxes on gains. The executive argued that implementing the proposal amounted to unprecedented and unchecked tracking of residents’ daily lives. 

Accommodate Input of Crypto Industry Stakeholders in Formulating Regulation

Amanda Tuminelli from the DeFi Education Fund echoed Zlatkin’s arguments on formulating sensible crypto regulation. She added that regulators should accommodate the input of the industry players, given their superior understanding of how protocols operate.

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Tuminelli warns that regulators would stifle innovation from the insufficient understanding of protocols’ mechanisms before proposing expansive rules. She reiterated her pronouncements during the Messari Mainnet 2023 the need to involve the industry stakeholders when formulating rules.

The proposal by the Biden Administration is rattling the leading crypto exchanges now obligated to report customer and transaction details to the IRS. Several pro-crypto lawmakers have criticized the approach deployed by the Democrat-led administration to close tax gaps on digital assets investments. 

The proposal featured a revised definition of broker to incorporate an expanded role of facilitating crypto purchases and sales alongside tracking and reporting key details. The revised rules replicate the approach in stock and bond brokers. 

The proposed tax rules target decentralized exchanges, including Uniswap, given that they are critical constituents of the DeFi industry. 

The decentralized exchanges run under a unique mechanism from the centralized platforms such as Coinbase and Binance. The DEXs facilitate trading in digital coins and tokens without obligating sign-up and disclosure of personal identifiers, including name, government-issued identity card, and address. 

The DeFi world faults the proposal with the Washington, D.C.-based DeFi Education Fund urging the halt of broker rulemaking in a Tuesday, October 17 post. The nonprofit entity argued that the rule would trigger serious privacy and tax policy concerns. 

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