Investment and speculation are the main drivers for the extremely high valuations of various cryptocurrencies. Since the infancy of the cryptocurrency industry, there have been numerous efforts to replicate the success that algorithmic trading has offered investors in the traditional world of publicly traded securities. Development of these platforms and the algorithms that drive them are another highly-qualifying R&D activity with regard to the R&D tax credit.
This includes developing automated trading and risk management platforms, developing performance-testing environments with real-time data feeds, data connections to existing exchanges, developing front-end experiences to deliver functionality to users and administrators, developing advanced algorithms to accurately identify signals in the market, creating systems to meet regulatory requirements, and finally validating these systems for accuracy and performance. In this constantly changing landscape, developing, deploying, and maintaining systems is a never-ending task. That perpetual change lends itself to ongoing annual R&D credits. Further, these tend to grow with the size and scope of the company conducting the research.
Principles of engineering and physical science were relied upon to create new or improved designs, methods, and processes. The firm designed and evaluated alternatives to ensure that the plans would meet specific requirements. The firm’s research and development cycle was continuous and iterative as each phase of development yields additional data that was leveraged to achieve a result. Numerous R&D initiatives were simultaneously pursued each year, and each initiative was unique.
Another growing segment for blockchain is the NFT market. Non-fungible tokens are essentially digital certificates confirming ownership of a digital asset on a specific blockchain. Since the birth of smart contracts, NFTs have exploded and now cover items such as digital works of art, virtual trading cards, and even digital land deeds for game and VR environments. Developing the assets themselves will not always qualify, but the time in creating new blockchain infrastructure, mechanisms for minting (creating) NFTs, custodial infrastructure, unique user experiences, and even testing can qualify for the R&D tax credit. Within the NFT world, companies may also have extensive hosting requirements. Where this is done via traditional cloud servers, costs for any development sandboxes can also be qualified for the credit as long as the environment is purely for testing and development.
The ultimate demonstration of the utility of cryptocurrency is the push toward decentralized finance (DeFi). DeFi is a blockchain-based form of financial infrastructure that does not rely on traditional banks, exchange, or other financial institutions to deliver financing, hedge against risk, and earn interest via smart contracts to create a trustless financial network. Development of this type of infrastructure is cutting edge and much of it, like its other blockchain counterparts qualifies for the R&D tax credit. Functionality such as development of liquidity pools, collateralized lending pools, flash loan infrastructure, among others are all considered qualifying activity. Once development on these types of features is completed, additional time can be qualified for the testing and validation of these elements within the platform.
