Aurora – NEAR perfect? What about the tax implications?

29 November 2023

If you’re passionate about using a crypto protocol that is fast, cheap, and offers ‘infinite scalability,’ you’re probably familiar with the concept of ‘sharding’ and with NEAR Protocol. 

NEAR Protocol has a number of value propositions. One of these involves sharding.  Here, the blockchain is divided into smaller parts or sub-chains operated by different validators.  This is a scalability solution, as partitioning prevents the network from becoming overcrowded. Of course, sharding also has the drawback of potential compromises to security.  The blockchain is partitioned, which reduces the hash power required for individual segments to function.  Consequently, this  renders the chain more vulnerable to attacks. However, developers are working around the clock to mitigate these issues.                        

What is Aurora’s value proposition?

So, where does Aurora fit in? Aurora is a Layer 2 network that runs an Ethereum Virtual Machine (EVM) on the NEAR network. An EVM is responsible for executing smart contracts on the Ethereum blockchain, which assists in processing transactions. But there’s more. Running an EVM on the NEAR network also enables Aurora to run smart contracts from Ethereum and other EVM-compatible networks.  These include Binance Smart Chain, Avalanche’s C-Chain, and Polygon.      

Running an EVM on the NEAR network also enables Aurora to run smart contracts from Ethereum and other EVM-compatible networks.         

As it is built on NEAR, Aurora benefits from the platform’s 2-3 transaction finalization and high scalability. The tech foundation, therefore, is pretty solid. Additionally, Aurora’s integrated token bridging system allows for transactions to be sent between the Ethereum and Aurora network.  No extra bridging steps required!  This makes the protocol attractive to traders and makes it much easier to transfer funds between individuals, especially if they are using different chains.  Decentralized apps that Aurora offers include 1Inch, Curve, and Solace. These help you get the best rates for token swapping, stablecoin exchanges, and to insure DeFi ventures against losses.          

What are the challenges from a tax reporting perspective?

Bridges between chains

When pulling data from online sources for the Aurora chain to import into crypto tax software, important information may be omitted.  Bridges to and from other chains are often not included in data files, even though they exist on the blockchain. Closer inspection and intervention are often required to enrich these datasets. At the same time, data integrity cannot be compromised.  Often, once these bridges are accounted for, token balance issues in the Aurora wallet will also have been resolved.  This increases the probability that your balances will match what the blockchain scanner states.      

Bridges to and from other chains are often not included in data files, even though they exist on the blockchain. Closer inspection and intervention are often required to enrich these datasets.

(Un)wrapping of tokens

As with bridges, the data exports obtained from blockchain explorers often do not indicate whether tokens are being wrapped or unwrapped. For instance, NEAR might be converted to wrapped NEAR, but you will only realize this once you inspect individual transactions on the scanner and not necessarily upon data export. These conversions must be accounted for. Otherwise, balances of either the token or the wrapped token may be incorrect and contrary to what the scanner reports.  Moreover, where the counterpart of a wrap or an unwrap is omitted, the tax software will treat it as gains or losses, which should be conversions.        

Contract addresses of niche tokens

Aurora’s DeFi ecosystem contains protocols that are popular among traders. The correct token contract address must be imported for the software to report the correct tokens.  Since some tokens traded on these DeFi protocols aren’t very common, they may either not be supported by crypto tax software or be mistaken for a different token. This could have significant tax implications if the token erroneously thought to be correct differs significantly in market value upon disposal.

The correct token contract address must be imported for the software to report the correct tokens. 

What can we learn from this?

NEAR-based Aurora has much to offer from the speed, ease, and scalability perspective. Its sound tech foundation, the ease with which tokens can be bridged to and from the chain, and the decentralized apps it offers are all causes for optimism regarding blockchain use cases. However, the tax challenges that a chain such as Aurora presents should be kept in mind and addressed, preferably with professional help. 

 

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