Which inspires greater fear?
“Nothing is certain except death and taxes,” Benjamin Franklin once wrote. The old saying from one of America’s founding fathers has never been truer in the crypto age. The crypto world tends to lean towards “death maximalism” in the sense that they overlook the other certainty in life: taxes. This is problematic because crypto owners often get a bad rap, including tax avoidance. It is not conducive to promoting Web3’s public image and adoption.
On the other hand, filing taxes on crypto assets is a huge pain in the proverbial butt. It’s true that some places are arguably better than others, but the bar is so low that any guidance is often a godsend. The reason is largely due to ambiguous or predatory fishing rules, and the lack of understanding of how they can or will be used. (Have you tried explaining vote-locked token leverage or even liquidity pools to your accountant?) And crypto people are rightfully afraid of paying too much tax.
And this doesn’t even begin to touch on the clunky reporting available. Do you take screenshots of CoinGecko to prove historical prices? Been there done that. Trying to establish the profitability of a liquidity pool in an Excel spreadsheet? Check. Sure, more and more tax calculator apps are popping up, but even if you get them working, you still need to know the tax rules AND configure the tax settings for your region, or rely on a startup to know each of the tax rules at federal, state, and municipal level that applies to you. Good luck with that….
So we are left with two options, it seems: risk over- or under-reporting, and the impact this may have. Or pay accountants and tax lawyers huge sums to hopefully ensure compliance. Rock, please meet the Hard Place.
Sure, the situation is bound to improve, but let’s be honest, what’s available now is just stopgap. It’s all trying to blend one system into another. And not only is it uninspired and very Web3-unfriendly, it’s also time-consuming and expensive.
So why don’t we look outside the box?
I am a pragmatist and therefore believe that the successful interoperability between Web2 and Web3 will help drive Web3 even further. But it requires the ability to calculate across these two landscapes. The concept is emerging, with efforts large and small attempting to drive this federated approach forward.
Juan Benet at Filecoin has called this idea “computation over data.” Others, like those at Nevermined, call it data in-situ calculation. Regardless of the terminology, the idea is the same: move the calculation TO the data, and execute the appropriate analytical rules where the relevant data already “lives”.
At the moment we take our data (or worse, a very diluted sample of that data) to the rules and hope we don’t get angry letters from the tax office. Wasted time. Bad vibes.
Instead, what if we could bring the rules to the data?
What if the Internal Revenue Services in this world could make their rules available in the form of analysis packages, including both the environmental layout and the applicable rule model, tailored to your specific situation. What if a crypto holder can also invite these rules into their portfolio data in a unified learning capacity. This means you don’t have to send your data to the tax authorities, but can still provide access to your portfolio, this time under your control.
The result of this decentralized calculation is a number: the tax you owe. Add some privacy-preserving measures like zero-knowledge proof or homomorphic encryption, and the tax office can trust that this number is the fair and proper amount you have to pay, without having to disclose your assets in detail.
Secret handshake (literally). Everyone is happy. And it represents a system where the tax authorities work for you, rather than the other way around.
But what if we take this further? What if you could choose the frequency at which the rules engine runs on your investment portfolio? Perhaps you are a small business and are optimizing for just-in-time tax payments on a monthly basis, rather than having to pay up front. Or perhaps, to provide more frequent and transparent insights and payments, the tax office reduces your total tax burden altogether.
The benefits of these types of applications are as varied as the tax codes they can enable. Instead of the existing state of ambiguity and confusion, we could have openness and trust. Instead of a one-size-fits-all approach to taxation, we can enable tailor-made tax applications in a reliable and scalable way.
It is this upside that is so exciting and promising about Web3 and its web-scale application. It presents a future world where stakeholders act as partners rather than nemeses, working together to optimize towards collective benefit and symbiosis.
Personally, I would prefer this world to one of death after taxes.
