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.
<aside> ๐คฌ 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:
While tax treatments for digital assets vary by jurisdiction, the core problem stems from a lack of accurate transaction data to calculate a userโs 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, weโve identified two shortcomings that can be addressed today:
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.