THORChain is a decentralized platform that allows its users to swap crypto across different crypto blockchains without the assistance of a third-party. The technology pushes forward one of bitcoin’s original concepts of censorship resistant activity with no trusted third-party across multiple blockchains. The remainder of this paper briefly discusses the THORChain technology and why users may find the technology’s features attractive. The paper concludes by discussing the tax implications that are still present despite no third-party being involved.
THORChain successfully created a decentralized platform that allows users to convert bitcoin to ether and vice versa. Users are also able to exchange other crypto positions for Litecoin, bitcoin cash, binance chain, and tether. THORChain has plans in the future to integrate more blockchains with its technology. As a result of THORChain, individuals wishing to exchange crypto positions in the six cryptos listed above no longer need to go through a centralized authority like an exchange, submit KYC (know your customer for those new to the space), and, importantly, as a result of the decentralized feature, the movement from chain to chain for the six blockchains currently supported by THORChain are now censorship resistant. In fact, the sole requirement to exchange bitcoin for one of the five other cryptos supported by THORChain is the ability to make a bitcoin signature. There are no other requirements!
While many without a deep understanding of the crypto ecosystem may believe a technology like THORChain will only be used by nefarious actors, there are myriad legitimate problems THORChain solves. First, signing up for exchanges can be a long, time consuming process. An individual may not have time or want to deal with the hassle or price volatility that could occur during the sign-up process. As mentioned above, the only item needed to convert bitcoin to another cryptocurrency THORChain supports is the ability to make a bitcoin signature. The simplicity and efficiency THORChain offers is attractive.
Furthermore, individuals who elect to utilize THORChain will not have their crypto assets restricted as is often the case when crypto assets are transferred to centralized exchanges. Additionally, THORChain users do not need to worry about an exchange being hacked as there is never a need for a centralized third-party custodian to touch the crypto as the exchange is taking place using THORChain.
THORChain has many bells and whistle that allow it to carry out this remarkable, decentralized technological achievement. We believe the technology advances the space and has numerous positive use cases. However, and most critically, an individual converting one crypto to another crypto on THORChain will still have a tax recognition event that must be reported to the IRS.
Let’s suppose McGee purchased two bitcoins for $8,000 back in 2018. McGee wants to exchange some of his bitcoin for Litecoin as he needs a quicker transaction speed for some anticipated purchases in the coming months. McGee learns he can exchange a portion of his bitcoin position for Litecoin on THORChain. The price of bitcoin is currently trading at $55,000 while Litecoin is trading at $300. McGee executes the trade on the THORChain platform exchanging 0.5 of his bitcoin for 91.5 Litecoins. There is a fee of $50 associated with the transaction. While there is no third-party handling McGee’s transaction, McGee would still owe taxes as a result of the exchange of bitcoin for Litecoin.
McGee’s basis in the bitcoin he sold, 0.5 bitcoin, was $2,000 ($8,000 * 0.5). At the time of the transaction the 0.5 bitcoin had a fair market value of $27,500 ($55,000 * 0.5). Therefore, McGee would have to recognize $25,500 ($27,500 – $2,000) in long-term capital gains as a result of the exchange.
McGee received 91.5 Litecoins in exchange for his bitcoin. His basis would be the cost of his 91.5 Litecoins, $27,450 (91.5 * $300), plus the transaction costs incurred in the exchange, in this case $50. Therefore, McGee’s basis in his Litecoin would be $27,500 ($27,450 + $50). This number will be pertinent when McGee uses his Litecoin for his upcoming transactions.
THORChain’s technology makes the crypto ecosystem more efficient and censorship resistent. However, it does not allow its users to exchange crypto assets without the recognition of capital gains or losses. While many users may think they can get away with avoiding taxes with technology like THORChain combined with anonymous wallets, the IRS recently announced it was enhancing its efforts to find users evading taxes through crypto products. Individuals using THORChain need to understand the clear tax ramifications of exchanging crypto and be aware of the risks of not reporting their taxes to the IRS. If you have any questions regarding the topics discussed in this article, please contact us.
