Crypto from DeFi or an airdrop: how do you prove the source of funds?
Date: | Week 44 | Reading time: 6 minutesAuthor: Simcha Schrijver
In brief
If you earned crypto through DeFi, liquidity pools, lending or an airdrop, you often have no tidy statements from an exchange. When your bank or conveyancer asks about the source of funds, you need to show where the proceeds came from.
Paucitas sees in practice that the source of DeFi and airdrop funds can be evidenced, because every step is recorded on the blockchain. What matters is a clear structure that a bank can follow.
Do you need to evidence your source of funds? Contact Paucitas. An initial conversation comes with no obligation.
Put simply
The source of DeFi proceeds and airdrops can be evidenced, but not with a single statement. It is about the whole path: from your first deposit to the money in your bank account. Ask Paucitas to take a look.
Years ago you bought crypto and used it in DeFi. You put coins into a liquidity pool, lent them out or received tokens through an airdrop. Now you want to sell part of it, or you are buying a home, and the bank asks where the money came from. You know exactly what you did, but on paper it is difficult. It happens regularly, and it can be resolved.
Why does the bank ask about the source of DeFi proceeds?
Under the Money Laundering Regulations 2017, banks and conveyancers must understand where money comes from, especially with larger amounts. With a salary or the sale of a car, that is simple. With DeFi it is harder, because the proceeds do not come from one known party. There is no annual statement from a bank, only a series of transactions on the blockchain. The bank wants to see that the series adds up and that the money has a legitimate source.
What makes DeFi and airdrops hard to evidence?
A regular exchange gives you statements of your purchases and sales. With DeFi you deal directly with smart contracts, without an intermediary that produces statements. An airdrop can simply appear in your wallet, and tokens are often swapped for other tokens along the way. The result is a chain of steps that is hard for an outsider to follow.
Which records do you need?
The more complete, the better. Think of:
- The wallet addresses you used.
- Where and when you first bought crypto, and with what money.
- Which DeFi platforms, pools or airdrops are involved, and in which period.
- Statements from exchanges where you bought or sold crypto.
- Your Self Assessment returns in which you reported crypto to HMRC.
Do you no longer have everything? That is no reason to give up. The blockchain holds far more than people think.
When does DeFi need extra attention?
Some situations make the path more complex. For example if you moved crypto to another network through a bridge, converted tokens into a so-called wrapped version, or used many different wallets over the years. An old wallet you can no longer access can also look like a gap in the story. Paucitas sees that these steps can often be connected well, because they remain visible on the blockchain. It does take experience to put them in the right order and explain them in language a bank understands.
How does Paucitas approach a source of funds investigation into DeFi?
Paucitas starts at your first deposit and follows every step from there: the deposit into a pool, the rewards, token swaps and the final sale. An airdrop gets its place too: when it arrived, at which address and why you were entitled to it. Paucitas carries out all research itself and also sets your documents, messages and statements alongside the blockchain. The result is one report with a timeline in which every pound can be followed.
Not sure whether your situation is suitable? Contact Paucitas and we will look together at what is needed.
What can you do with the Paucitas report?
The report is meant for whoever asks for it: your bank, conveyancer, mortgage lender or accountant. It shows step by step where your wealth came from, so the reviewer can check it themselves. Paucitas sees that a bank usually reaches a decision much faster with this kind of structure than with loose screenshots. Whether the question comes from your bank or from HMRC, one report gives you a solid basis.
Why people trust Paucitas
Paucitas is an independent firm of crypto specialists, established in the Netherlands with its own office, where you are welcome to visit. Paucitas investigates hundreds of cases a year. Paucitas does not give tax advice, but sets the facts out in a verifiable way. Before any work starts, Paucitas discusses a tailored quote with you, with no surprises afterwards. An investigation usually takes from the same day to about two weeks.
Paucitas can be reached 24/7 on +31 20 244 5774. Through the form you will hear from us within 1 to 3 hours, and we answer e-mails within 24 hours, usually the same day.
Sources: legislation.gov.uk, Money Laundering Regulations 2017, regulation 28; gov.uk, tax when you receive cryptoassets.
Do you have questions about this blog?
Feel free to get in touch with Paucitas. Paucitas can be reached by phone 24/7, including evenings and weekends. Through the contact form we usually reply within 1 to 3 hours, and we answer e-mail within 24 hours.
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Frequently asked questions about the source of DeFi and airdrop funds
Can I evidence the source of an airdrop?
Paucitas can in most cases show when an airdrop arrived, at which address and where it came from. It also matters why you were entitled to it, for example because you used a platform earlier.
I have no statements from DeFi platforms. Is that a problem?
Paucitas works directly with the data on the blockchain. DeFi platforms rarely produce statements, but every transaction can be found. With your wallet addresses, Paucitas can usually reconstruct the path well.
Will the bank accept a Paucitas report?
Paucitas cannot promise what a bank decides, because the bank makes its own assessment. Paucitas does make sure the report is complete, verifiable and easy to follow, so the bank has everything it needs to decide.
Does Paucitas also give tax advice on DeFi?
Paucitas does not give tax advice. Paucitas sets out the facts and amounts verifiably, so you or your adviser can take it further with HMRC.
How long does a source of funds investigation into DeFi take?
Paucitas usually completes an investigation between the same day and about two weeks. It depends on the number of wallets, platforms and years. Call 24/7 or fill in the form and you will hear from us within 1 to 3 hours.
From Amsterdam, for the whole of the UK
Everything can be done fully online. Prefer to meet in person? You are very welcome at our office in Amsterdam, by appointment.
Paucitas is an independent expert firm based in the Netherlands that, for clients across the UK, investigates investment fraud and crypto fraud, establishes the origin and legitimacy of crypto assets and prepares expert reports for legal proceedings and compliance.
Your own situation
If you are reading this, you probably have a question about your own situation. That is exactly what Paucitas does.
The first step is contact by phone. You can book that call by phone or through the contact form, so you do not have to wait. In the call we look together at what can factually be established in your case and what Paucitas can examine for you.