Decentralized Finance (DeFi) and Taxation: Challenges and Opportunities in the Age of Transparency

The paper explores the complex regulatory and taxation challenges posed by DeFi, emphasizing how existing financial regulations may struggle to adapt to DeFi’s decentralized architecture while highlighting how traditional tax enforcement mechanisms, reliant on intermediaries and identifiable entities, can become ineffective. Furthermore, the paper discusses how initiatives such as the OECD’s Crypto-Asset Reporting Framework (CARF) and FATF guidelines for anti-money laundering (AML) may help increase transparency within the DeFi ecosystem.
The paper also proposes potential solutions, including implementing embedded supervision, regulating centralized entry and exit points, and introducing withholding taxes within the DeFi ecosystem. Moreover, it calls for international coordination to develop standardized tax frameworks and enhanced cooperation among regulatory bodies. Ultimately, the paper argues for a balanced approach that fosters DeFi innovation while ensuring robust compliance with tax and regulatory obligations, recognizing that some traditional mechanisms remain relevant even in the DeFi context.