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Vulnerabilities Of Decentralized Exchanges
By Laxmikant Khanvilkar
Investors/traders are in dilemma with regards to choosing exchange for trading cryptocurrency. Their preference to select a particular exchange is based on several other aspects, including the ability to complete trade in a secure way and most importantly, to know whether the trade executed in a particular exchange is authorized, recognized by regulating authorities. It is important to trade on authorized exchange since that would determine tax obligations.
Exchanges are broadly categorized as centralized and decentralized exchange. Decentralized exchanges (DEXs) offer users the ability to buy, sell, and trade cryptocurrencies without relying on a third-party central authority, which is completely in contrast to centralized exchanges operations. DEXs are powered by a decentralized network of users, offering users the benefits of increased privacy, security, and autonomy. However, the regulatory environment and tax implications of using a DEX remain largely unclear.
The Internal Revenue Service (IRS) requires U.S. taxpayers to report their cryptocurrency transactions. However, since decentralized exchanges (DEXs) lack a central authority, they are unable to report transactions to the IRS. This raises the question of how U.S. taxpayers who use DEXs will fulfill their reporting obligations.
The IRS has made it clear that cryptocurrency transactions, including those on DEXs, are subject to capital gains and losses tax treatment. This is because virtual currency is treated as property for tax purposes. Therefore, users of DEXs are not exempt from their tax obligations.
Users of decentralized exchanges (DEXs) must be mindful of their cryptocurrency transactions and ensure they accurately report them on their tax returns. DEXs do not provide centralized reporting, and thus users are still responsible for fulfilling their tax obligations. Failure to do so could lead to penalties and interest charges from the IRS.
In summary, although DEXs offer a lot of advantages, including privacy and security, they do not exempt users from their tax obligations. It is the responsibility of users to properly report their crypto transactions to the IRS.
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