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IRS Wants to Track Crypto DeFi Transactions with Free Software

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By Jaden Francis - - 5 Mins Read
A magnifying glass highlights the IRS logo on the Internal Revenue Service website
Photo | Shutterstock

IRS to track crypto transactions for taxpayers with "Direct File" program in 13 states by 2024.

Tax software for DeFi streamlines process, eliminates 1099 forms, and plans to integrate AI for improved tax reporting.

A magnifying glass highlights the IRS logo on the Internal Revenue Service website
Photo | Shutterstock


The US Internal Revenue Service (IRS) is developing new software to simplify the process of tracking cryptocurrency transactions for taxpayers.


This software is mainly aimed at those who use decentralized finance (DeFi) platforms. The IRS tested a "Direct File" pilot program and will begin implementing it in 13 states in 2024.


The new tax reporting software for DeFi transactions eliminates the need for the IRS to process millions of 1099 forms and streamlines the entire process. The tax-reporting body also plans to integrate artificial intelligence to improve tax reporting.


This proposed bill by the US Treasury Department would have required DEXs to collect and report personal user data, just like centralized exchanges like Coinbase. However, this new software removes the need for that additional regulation.


DeFi tax calculator makes it possible for DeFi users to track their transactions and calculate their capital gains or losses for the year.


By entering their wallet address into a dedicated box, they can generate a comprehensive and reliable report of all taxable transactions on DEXs without the need for a centralized intermediary. This new software could potentially change the rules for crypto tax reporting.

Will this DeFi Tax Calculator work? 

On the one hand, such a tool would eliminate the need for decentralized platforms to collect and report user data to the IRS. In the long run, the data might be vulnerable to data breaches and other security issues.


On the other hand, this tool would help the IRS crypto tax rate. It would let them collect taxes on the growing number of crypto transactions on DeFi platforms, potentially leading to significant revenue for the government.


A person calculating taxes
Calculating taxes | Shutterstock


DeFi tax calculator would save DeFi developers from having to comply with a law that is not well-suited to the decentralized nature of these platforms.


Given the lack of a human intermediary, it would mean asking them to collect and report user data. Unlike traditional financial institutions, DeFi platforms do not have control over their users' transactions. 


This proposal fails to recognize the benefits of decentralized and non-custodial software. Decentralized software removes the need for intermediaries, who often carry risks such as cybersecurity threats, data breaches, fraud, and mismanagement. When users control their own data, these risks are significantly reduced.


It's important to understand that DeFi applications are unlike traditional financial institutions, where a centralized authority is responsible for the transactions.


Instead, these applications are simply software that enables users to interact with the blockchain. Therefore, it would be impossible for the developers of these applications to collect and report user data, as they do not have access to this information. 


The proposal would treat all AMMs, self-custodial wallets, and decentralized trading protocols the same as centralized exchanges like Coinbase, Binance, and Kraken. This would require these decentralized services to report user data to the IRS, just like centralized exchanges. Requiring such a report would create an unsafe space for using KYC in cryptocurrency trading. It would be a blow to the principles of decentralization and privacy on which cryptocurrency is built.