Tornado Cash Tax Guide
Tornado Cash Tax Made Easy
Reporting tax with a platform such as Tornado Cash can seem daunting, but it doesn't have to be. CryptoTaxCalculator imports and categorises all the transactions from the wallet you used on Tornado Cash, allowing you to generate tax reports quickly and easily. Crypto investors commonly use multiple wallets, exchanges and chains, which can lead to a convoluted transaction trail that can be hard to track at tax time. CryptoTaxCalculator integrates with all of your favourite exchanges, wallets and blockchains, allowing you to consolidate you data and track profits, losses, and income. This guide covers how to get started with your Tornado Cash taxes so you can sort out your tax nightmare today.
Let’s dive right into it! Here’s a quick and easy breakdown of how to import your Tornado Cash transaction history into CryptoTaxCalculator:
1. Tornado Cash is available on
Ethereum, Binance, Polygon, Arbitrum, Avalanche, xDai and Optimism.
2. Locate and copy the wallet address/es you used to transact on Tornado Cash.
This will be accessible via the wallet you used to connect to the Tornado Cash originally (e.g. if you use Metamask, navigate to the wallet you used and you’ll be able to copy your wallet address from there).
3. In CryptoTaxCalculator enter the associated blockchain you used when interacting with Tornado Cash into the search field or scroll down.
For example, Ethereum, Binance, Polygon, Arbitrum, Avalanche, xDai and Optimism.
4. Enter the wallet address into CryptoTaxCalculator, provide an optional nickname, and click **Add Wallet**. It is possible to add multiple wallet addresses after you add the first.
5. Your wallet/s will now sync and CryptoTaxCalculator will pull in all the transactions associated with your wallet on that chain, including any transactions on Tornado Cash. If this wallet has interacted with other platforms, those will be imported as well.
Why are DeFi taxes so difficult?
Decentralized finance (DeFi) platforms, such as Tornado Cash, offer people access innovative financial products in a decentralised and autonomous way. However, one crucial aspect that DeFi platforms can't currently provide is the ability to generate a user's tax forms.
The main reason for this is that DeFi platforms do not get the 'full story' of your transaction history. For example, Tornado Cash only has the ability to calculate taxes on the transactions that happen on the platform. This leaves a gaping hole of information, such as where the crypto currency came from and how much it was purchased for, which is required to determine a cost basis. Without this, the tax calculations could be incorrect. DeFi platforms also typically lack the centralized structure and compliance mechanisms required to generate tax forms for users. Unlike centralized exchanges that collect and store user data in a centralized manner, DeFi platforms operate on a decentralized network that doesn't require users to provide personal information, such as their tax identification number. As a result, DeFi platforms lack the required user data to generate accurate tax forms for the individual.
Another issue is that the tax laws for cryptocurrencies and DeFi transactions are still largely undefined and constantly evolving. DeFi platforms often facilitate complex transactions involving multiple assets and protocols, which can make it difficult to determine the tax implications of each transaction.
Therefore, it is up to the individual user to keep track of their DeFi transactions and report them accurately on their tax forms. While this may seem daunting, but CryptoTaxCalculator can help you manage and stay on top of your DeFi taxes by automatically importing and categorizing transactions made with platforms like Tornado Cash.
Can tax authorities find my DeFi transactions?
The decentralized and anonymous nature of DeFi leads some crypto investors to believe that they can fly under the radar and avoid tax reporting requirements. However, tax authorities are increasingly trying to catch those not playing by the rules and avoiding tax. Tax authorities around the world are adopting new techniques to identify and track crypto transactions, including those on DeFi platforms.
It is important to remember that decentralized blockchain data is publically available information. Tax authorities can identify DeFi transactions associated with an entity by analyzing public blockchain data and tracking the transaction trail left by a wallet or group of wallets. While users' identities are not immediately accessible on the blockchain, the public nature of blockchain data can still provide valuable information about the volume and nature of transactions.
In addition, tax authorities can assign identities to certain wallets through Know Your Customer (KYC) data collected on centralized exchanges. When users transfer funds from centralized exchanges to a wallet used to interact with DeFi platforms, they leave a trail that can be traced back to their identity through KYC data.
Furthermore, tax authorities can use other tracking data, such as IP addresses and browser cookies, to track user activity on DeFi platforms.
While tax authorities may be behind on the technical side of crypto, the immutable and public nature of blockchain data means that transactions made now can still be scrutinized by authorities in the future. This could lead to mass audits of blockchain data once the authorities catch up. Don't get caught out in the future, stay on top of your tax obligations and sleep easy at night by utilizing software such as CryptoTaxCalculator to sort out your DeFi taxes.
The information provided on this website is general in nature and is not tax, accounting or legal advice. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness of the information having regard to your own objectives, financial situation and needs and seek professional advice. Cryptotaxcalculator disclaims all and any guarantees, undertakings and warranties, expressed or implied, and is not liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or incidental or Consequential Loss or damage) arising out of, or in connection with, any use or reliance on the information or advice in this website. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information in this website is no substitute for specialist advice.