📊 Background

Demand for crypto tax software increased 33x from 2018 to 2022, highlighting tax filing as a primary anxiety of new users and institutions looking to gain exposure to crypto / DeFi. Expectations of a tightening regulatory environment for digital assets may spur similarly robust growth in the compliance software market in the coming years.

Currently, the $150M retail market comprises several leading tax accounting companies which use similar infrastructure to deliver liability estimates across major blockchains and centralized exchanges.

🚨 Problem

<aside> 🤬 Incumbent tax calculators are routinely off by as much as 88,000% for sophisticated DeFi users - due to incorrect cost bases, inaccurate transaction classifications, and non-standardized P&L estimates.

Existing solutions uniformly rely on the same inaccurate, non-scalable transaction categorization methodology, specifically:

• Getting transaction data (incl. method IDs) from third-party data feeds (i.e. block explorers)

• Manually tagging smart contract functions / method IDs for every DeFi protocol to a tax treatment </aside>

• Reviews for incumbent tax software:

What’s wrong with current solutions?

While tax treatments for digital assets vary by jurisdiction, the core problem stems from a lack of accurate transaction data to calculate a user’s tax obligation. This is due, in part, to the complexity of DeFi protocol transactions (AMMs - UNI, SUSHI; Borrowing & Lending protocols - AAVE, COMP; and NFT marketplaces - OpenSea, LooksRare).

However, we’ve identified two shortcomings that can be addressed today:

1. Existing software largely relies on block explorers to pull on chain transaction data. However, this data is subject to significant faults, resulting in roundtrip errors of over 88,000% in estimating the cost basis and net gain / loss for trades.
2. Involving third parties and manual labor in data aggregation / transaction classification results in delays in supporting new protocols and often necessitates user intervention to avoid errors in tax calculation.

Growing urgency to solve the problem

In August 2022, the Inflation Reduction Act was signed into law and nearly doubled the IRS enforcement budget from $66.0B to $111.7B over the next 10 years. Outside of the US, changing tax / regulatory environments may be a growing barrier to further Web3 adoption. Cartera is part of the growing ecosystem of Web3 infrastructure that makes compliance and onboarding easier and less stressful for new users.