What Are Centralized and Decentralized Exchanges?
Exchanges are platforms where you trade crypto assets. They come in two main types:
- **Centralized Exchanges (CEXs):** Operated by a company. You deposit your tokens into their wallet. They match your trade internally. Examples: Coinbase, Binance.
- **Decentralized Exchanges (DEXs):** Run on blockchain smart contracts. You trade directly with other users, often without a middleman. Examples: Uniswap, Sushiswap.
Understanding the mechanics of each is key to tracking your taxes properly.
How Centralized Exchanges (CEX) Work
On a CEX, when you place a trade, the exchange records it internally. For example, if you sell 1 ETH for USDC:
- You deposit 1 ETH into Coinbase.
- Coinbase matches your sell order internally.
- You receive USDC in your account.
From your perspective, it’s like an internal ledger swap. The exchange's system records the trade as a disposal of ETH and acquisition of USDC.
When you withdraw funds, the exchange sends tokens to your wallet. The key point: your trade is recorded internally but not directly on the blockchain at the moment of trade.
How Decentralized Exchanges (DEX) Work
DEXs operate via smart contracts on the blockchain. When you trade:
- You connect your wallet directly to the DEX.
- You submit a trade transaction to the blockchain.
- The smart contract executes the trade between your wallet and liquidity pools.
For example, swapping ETH for DAI involves sending a transaction that interacts with Uniswap’s contracts. This transaction is recorded on the blockchain, creating a permanent, public record of the trade.
In essence, each swap is a blockchain event where your assets are exchanged directly on-chain.
Tax Tracking Implications of CEXs and DEXs
The IRS hasn't issued explicit rules for every exchange type. But general principles apply:
- **CEXs:** When you sell or trade on a CEX, it’s considered a disposal of property. You should record the sale date, proceeds, and your cost basis. Many tax tools automatically import these trades if connected.
- **DEXs:** Swaps on DEXs are also taxable events. Each transaction creates a disposal of one asset and acquisition of another. Since these are on-chain, they are visible in your wallet history. But tracking cost basis can be complex, especially if you don’t keep detailed records.
**Key point:** Regardless of platform, each trade—buy, sell, swap—is a potentially taxable event. Proper tracking is crucial, especially as DEX transactions leave an on-chain trail that can be analyzed.
Common Tax Mistakes with Exchanges
❌ Ignoring on-chain DEX transactions
Why
Many users think only centralized trades matter. But each swap on a DEX is a taxable event, and ignoring it leads to underreporting.
Fix
Use software that imports on-chain transaction data and tracks cost basis accurately.
⚠️ Cost
Potential IRS penalties and back taxes if missed.
❌ Not recording withdrawal or deposit dates
Why
Without dates, matching buys and sells becomes difficult, increasing audit risk.
Fix
Keep detailed logs of all transfer dates and amounts from exchanges and wallets.
⚠️ Cost
Incorrect gains or losses reported.
❌ Failing to track token-specific cost basis
Why
Tokens acquired at different times and prices need separate tracking.
Fix
Maintain detailed records for each purchase and swap.
⚠️ Cost
Incorrect capital gains calculations.
How Moonscape Tracks Exchange Activity
Moonscape automatically imports transactions from both CEXs and DEXs. We recognize trades, swaps, deposits, and withdrawals, regardless of platform.
- For CEXs, we sync trade data directly from integrations.
- For DEXs, we parse on-chain transactions and identify swap events.
- We track your cost basis across multiple transactions and chains.
- Our system flags untracked or suspicious activity, helping you stay compliant.
This comprehensive view ensures you capture every taxable event, even from complex decentralized trading.