Why the IRS is way more F’d than you realize.
I haven't seen anyone talk about this major loophole, but I can't be the only one who has noticed it. Decentralized exchanges make taxing crypto assets impossible- and not just the txs that occur on DEXs.
This is absolutely not a "How to" or advice of any kind, but merely an explanation of something that everyone is going to realize soon enough.
Everyone knows that transferring crypto to wallets destroys the chain of custody, and makes it impossible to prove who owns the crypto, but some people may not realize that taxing bodies like the IRS, for example, do not follow the 'innocent until proven guilty' legal standard. If you are ever audited by the IRS, and they have a statement from a KYC exchange that says you had crypto, you are guilty until proven innocent. It's no different than an independent contractor being 1099'd for a cash gig. You can't just say you didn't keep the money, you have to prove your deductions or you owe tax on it regardless of where it is now. That's a mess, but that's not the biggest problem.
Where crypto gets weirder than people expect, aside from the minimal KYC standards some of these exchanges require for crypto to crypto transactions (like entering a random SSN is proof of who owns the account?), is that crypto creates the opportunity to turn the exact same flimsy evidence of gains into evidence of tax deductible losses.
How many people are going to use a KYC exchange to buy the worst, scammiest crypto they can find, then move their shitcoin to a decentralized exchange, swap it out for BTC, then hodl until the shitcoin tanks so they can buy the same number of shitcoins again, move them back to the KYC exchange and have equal weighted evidence of a loss and now the IRS owes them a deduction?
This is a huge problem, because it undermines their standard of evidence for crypto gains to begin with, and there's nothing they can do to stop people from doing it over and over.