“Nothing is certain except death and taxes,” Benjamin Franklin once wrote. The old adage from one of America’s founding fathers has never been more true in the age of crypto. The crypto world tends to skew towards “death-maximalism” in the sense that they overlook that other certainty in life: taxes. This is problematic because crypto owners often get a bad rap, including tax avoidance. That’s not beneficial to furthering Web3’s public image and adoption.
On the other hand, filing taxes on crypto assets is a massive 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 cause is largely due to ambiguous or predatory fiscal rules, and the lack of understanding how they can or will be applied. (Have you tried explaining vote-locked token leverage or even liquidity pools to your accountant?) And crypto folk, rightly so, are scared of overpaying taxes.
And this doesn’t even begin to touch on the clumsy reporting that’s available. Taking screenshots of CoinGecko to prove historic prices? Been there, done that. Trying to establish the profits of a liquidity pool in an Excel spreadsheet? Check. Sure, there are more and more tax calculator apps emerging, but even if you get them to work, you still need to know the tax rules AND configure the tax settings of your region, or rely on some startup to know each of the tax rules at a federal, state and municipal level that are applicable to you. Good luck with that….
So we’re left with two options, it seems: risk over- or under-reporting, and the impact this can have. Or paying accountants and tax lawyers huge sums of money to hopefully ensure compliance. Rock, please meet Hard Place.
Sure, the situation is bound to improve, but let’s be honest, what’s available now are just stopgaps. It’s all trying to mash 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’m a pragmatist and, therefore, a believer that the successful interoperability between Web2 and Web3 will help propel Web3 even further. But that requires the ability to compute across these two landscapes. The concept is an emergent one, with efforts large and small attempting to drive this federated approach forward.
Juan Benet at Filecoin has termed this idea “compute over data.” Others, like those at Nevermined, call it data in-Situ computation. Regardless of the terminology, the idea is the same: move the computation TO the data, and execute the appropriate analytical rules where the relevant data already “lives.”
Currently, we’re bringing our data (or worse, a very watered-down selection of that data) to the rules and hope that we don’t get angry letters from the tax office. Waste of time. Bad vibes.
Instead, what if we could bring the rules to the data?
What if the Internal Revenue Services of this world could make their rules available in the form of analysis packages, including both the environment setup and applicable rules model, tailored to your specific situation. What if also a crypto holder can invite these rules into their portfolio data in a federated learning capacity. This means that you don’t need to send your data to the tax authority, 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 in some privacy-preserving measures like zero-knowledge proofs or homomorphic encryption, and the tax office can trust that this number is the fair and correct amount you have to pay, without you having to divulge your assets in detail.
Secret handshake (literally). Everybody’s happy. And it represents a system in which the tax authority works for you, instead of the other way around.
But what if we take this further? What if you can choose the frequency that the rules engine runs on your investment portfolio? Perhaps you’re a small business and optimize for just-in-time tax payments on a monthly basis, instead of being required to pay in advance. Or perhaps, for providing more frequent and transparent insights and payments, the tax office reduces your overall tax burden entirely.
The benefits of this type of application are as varied as the tax codes they could enable. Instead of the existing state of ambiguity and confusion, we could have transparency and trust. Instead of a one-size-fits-all approach to taxation, we could enable bespoke tax applications in a trusted and scalable manner.
It’s this upside that is so exciting and promising about Web3 and its application at web scale. It presents a future world where stakeholders act as partners instead of nemeses, and work together to optimize toward collective benefit and symbiosis.
Personally, I’d prefer this world to the one of death by taxes.