Crypto Community Criticizes New IRS Reporting Rules for DeFi Brokers

Highlights:

• IRS rules for DeFi brokers require reporting digital asset sales and taxpayer details starting in 2027.
• The regulations focus on front-ends like decentralized exchanges for tax reporting purposes.
• Industry leaders hope Congress will reverse the tax rules using the Congressional Review Act.

On Dec. 27, the U.S. Internal Revenue Service (IRS) introduced guidelines for decentralized finance (DeFi) brokers. Starting on January 1, 2027, The rules require brokers to disclose gross proceeds from cryptocurrency and digital asset sales and details about the taxpayers involved in the transactions. The IRS estimates that these regulations will impact between 650 and 875 DeFi brokers.

The document does not apply to all DeFi applications equally. It emphasizes front-ends as key sources for information and tax reporting. Reporting rules target platforms like decentralized exchanges that enable digital asset transactions for users.

Aviva Aron-Dine, Performing the Duties of Assistant Secretary for Tax Policy, said:

“These regulations will help ensure that all taxpayers play by the same set of rules and have access to the information they need to file their taxes accurately. Aligning tax reporting requirements for digital assets with reporting for other assets will make filing easier and cheaper for compliant taxpayers while also helping close the tax gap.”

The IRS claims the regulation simply treats DeFi like other industries. It states that similar rules have applied to brokers for over 40 years. The Treasury Department and IRS deny any bias against DeFi in the regulations. They also believe the rules will not discourage law-abiding customers from adopting this technology.

IRS Reporting Rules on DeFi Brokers Face Industry Backlash

After the federal government’s announcement, key figures in the digital asset space expressed concerns on X. They voiced their opinions regarding the IRS’ latest rulemaking. Kristin Smith, CEO of the Blockchain Association, expressed disappointment, calling it an expected move. She said this action could push the American crypto industry offshore. Smith mentioned that the industry is ready to take strong action against the rules. She also expressed hope in collaborating with the new pro-crypto Congress and Administration to reverse these regulations.

The following statement is attributed to @BlockchainAssn CEO @KMSmithDC following the IRS' finalization of the broker rule today: pic.twitter.com/JvlaSVaT2t

— Blockchain Association (@BlockchainAssn) December 27, 2024

Alexander Grieve, vice president of government affairs at Paradigm, expressed hope for the new pro-crypto Congress. He suggested they could reverse the regulations through the Congressional Review Act (CRA) process. The CRA enables Congress to review and potentially block regulations issued by agencies like the IRS.

Katherine Minarik, chief legal officer at decentralized crypto exchange Uniswap, stated that there are plenty of ways to challenge the rule. She mentioned that the industry and other tech sectors will seek a limiting principle in response to the ruling.

Yep, @CampbellJAustin beat me to it. Reading fast here, but it sure does seem like the IRS says they’re regulating “any service effectuating transactions” as brokers… then goes on to classify DeFi tech as brokers… because it is involved in just a *part* of a transaction… as… https://t.co/H6zBG5sIK8 pic.twitter.com/j4dYzhuZJO

— Katherine Minarik (@MinarikLaw) December 27, 2024

Bill Hughes, a lawyer at blockchain firm Consensys, criticized the ruling. He argued it brings “all cost, no benefit” from a revenue perspective. In a Dec. 27 X post, he added, “The outgoing administration is not leaving quietly. The fight continues.” 

Trump’s Return Could Change IRS Reporting Rules

After the regulatory update, DeFi’s best chance for a tax reporting reversal may come when President-elect Donald Trump returns to office next month. Recently, Trump promised to overhaul digital asset regulations in the U.S. He appointed crypto-friendly former SEC commissioner Paul Atkins to lead the agency.