This year the Internal Revenue Service switched things up for people investing in the crypto sphere. The IRS wants to know all about your 2021 crypto transactions this tax season.
Investors now must report taxable 2021 transactions involving Bitcoin, Ethereum, Dogecoin, and other cryptocurrencies to the federal government, CNBC reported.
Because of this, many are considering using decentralized exchanges or DEX — a type of cryptocurrency exchange that allows for direct peer-to-peer cryptocurrency transactions without an intermediary.
Here are three reasons why DEX may be the future.
1. Crypto exchanges, left and right, are working with the Feds
In late 2021, Coinbase inked a $1.36 million deal with the U.S. Department of Homeland Security for analytics software. It was reportedly around 40 times larger than the agency’s last deal with the crypto exchange.
Under the new contract, Coinbase will provide U.S. Immigration and Customs Enforcement (ICE) with blockchain analytics software. Coinbase will also provide software to the U.S. Secret Service and Inland Revenue, according to the Federal Procurement Data System.
With exchanges making such deals with the government, many wonder if they will give the Feds information about investors who use their services.
“Idc if I have to debate 1 Million black people You niggas are going to learn: 1. Delete Coinbase 2. Stay away from XRP 3. DCA Bitcoin,” Jackson tweeted on Dec. 30, 2020.
Coinbase isn’t the only digital currency exchange looking to deal with the government. “Coinbase joins a crowded field of cryptocurrency analytics companies – Chainalysis, Elliptic, CipherTrace and others – vying for a piece of the federal pie,” CoinDesk reported. “Agencies from all corners of the U.S government regularly contract with crypto intel firms, inking deals for their tracing software worth millions, and sometimes stretching years.”
Binance recently bragged in a tweet about working with federal authorities.
“A suspected bad guy creates an account with a bank and a crypto exchange. The bank is ok, the crypto exchange is bad. Binance uses the same or stronger AML tools as banks. Binance helps all law enforcement agencies world wide with their cases. We get many thank you letters,” the company tweeted.
That didn’t sit well with many on Twitter.
“The question is do you get thank you letter from your customer for been fair in fishing out the real bad guy or you just do the bidding of law agencies by giving individual account out without evidence,” tweeted Josh Damol (@JoshDamol).
“This is why you freeze people assets? Do you even know all the assets was bought? Stop scamming us!…. U don’t just take ppl funds and claim u re helping fight criminals… Do ur investigations before locking people’s funds…. Binance is the bad guy here,” tweeted Emmyanthony (@Emmyanthony001).
2. How DEX works
Because DEXs allow cryptocurrency traders to make transactions directly without handing over management of their funds to an intermediary or custodian, the transactions remain relatively private.
DEXs were created to remove the requirement for any authority to oversee and authorize trades performed within a specific exchange, Coin Telegraph reported.
Users, who can only access their transactions with a private key, are not required to submit personal information like names and addresses.
On the other hand, centralized exchanges accounts are regulated entities that hold users’ funds for safekeeping.
The three main types of DEXs are automated market makers, order books DEXs, and DEX aggregators, Coin Telegraph reported.
There are some risks with DEXs. For example, if you lose your wallet’s recovery phrase/key, you lose your crypto, Trust Wallet reported.
Also, decentralized trading venues are built using smart contracts. If a trading platform’s code has vulnerabilities, it can be exploited, and funds are lost.
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?
3. Coinbase reports to the IRS
Coinbase sends Forms 1099-MISC to users who are U.S. traders and who made more than $600 from crypto rewards or staking in the last tax year.
The exchange sends one copy to the taxpayer and one to the IRS. And while the 1099-MISC does not report your capital gains or losses, you still have to, Token Tax reported.
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