IRS “DeFi Broker” Final Rule Faces Strong Opposition from the Crypto Industry, What Are the Chances of the Trump Administration Revoking It?

Author: Weilin, PANews

On December 27, local time, the U.S. Department of the Treasury and the U.S. Internal Revenue Service (IRS) released a final rule document for "DeFi brokers", triggering widespread criticism from the encryption industry. They require DeFi brokers to report digital asset sales revenue and collect digital asset sales starting in 2025. User KYC information.

The regulations will officially take effect 60 days from the date of announcement. However, the document also states that the period from 2025 to 2026 will serve as a transition period, during which a certain degree of grace may be granted, but the specific scope and standards of relaxation are not yet clear. After the grace period, the new regulations will apply to the sale of digital assets starting in 2027, and brokers will need to start collecting and reporting the data required for digital asset transactions starting in 2026.

Crypto industry insiders pointed out that in actual practice, it is users who facilitate transactions, and the IRS mistakenly defines DeFi service providers as brokers, forcing the collection of user information, which will cause huge privacy infringement issues and exceed exceeds the scope of the IRS's statutory authority. Some analysts believe that Trump may revoke the reporting rules, but since the effective date after 60 days overlaps with the new government taking office (January 20), the Republicans may be busy with other priorities. New regulations may force DeFi service providers to exclude American users from their services.

“DeFi Brokers” final rule requires reporting of brokerage gross revenue

and user information

This document from the U.S. Department of the Treasury and the Internal Revenue Service is called "Periodic Reporting of Gross Income of Brokers that Promote Digital Asset Sales Services." The previous version was published in August 2023 and opened a process for public collection of opinions. A total of to 44,000 comments. This time, the 115-page final rule requires DeFi brokers to provide customers with 1099 forms to collect user transaction information, including names and addresses. Also reports gross proceeds from the disposition of digital assets for clients in certain sales or exchange transactions.

According to the document, a DeFi platform may meet the definition of a broker if it is involved in facilitating the exchange or sale of digital assets (even through smart contracts) and exerts sufficient control or influence over the transaction process. The U.S. Department of the Treasury noted that the final rule applies to “front-end service providers” that interact “directly with customers,” meaning the entity that runs the main website used to access a decentralized protocol , rather than the protocol itself .

In the document, the IRS has divided the DeFi ecosystem into three independent tiers:

Interface Layer: Includes user-facing components such as screens, buttons, forms, and other visual elements on websites, mobile apps, and browser extensions. This layer is used to facilitate interaction between users and DeFi participants.

Application Layer: The layer that executes user transaction instructions and is part of the transaction verification process.

Settlement Layer: Responsible for recording financial transactions on the distributed ledger, including transactions conducted through DeFi protocols.

The IRS believes that only the interface layer, specifically "front-end trading services", will be considered a "broker." The basic principle is: the front-end trading service has the closest relationship with the customer, so it can obtain the customer's KYC (Know Your Customer) information and report relevant data to the IRS. The IRS said front-end trading services include websites, non-custodial wallets and browser extensions that allow users to exchange digital assets through its interface. (Unhosted wallets that are only used to manage private keys, that is, unhosted wallets, do not fall under the scope of brokers.)

Much of the document outlines comments received and definitions of many of the underlying concepts, as well as the views of two government agencies, the Treasury Department and the IRS, who believe that "DeFi brokers" should follow the same rules as brokers that deal with traditional securities. rules. The document also states that “Treasury and the IRS disagree that the final regulations reflect a bias against the DeFi industry or that they will hinder law-abiding customers from adopting this technology.”

According to IRS estimates, between 650 and 875 DeFi brokers will be affected by these final regulations.

“Information reporting by DeFi brokers under Section 6045 will improve taxpayers’ own compliance because the income earned by taxpayers who participate in digital asset transactions without a custodial broker will be more transparent to the IRS and taxpayers.” The Internal Revenue Service (IRS) estimates that the new rules will affect up to 2.6 million taxpayers.

"These regulations will help ensure that all taxpayers follow the same rules and have access to the information they need to accurately file their taxes," Acting Assistant Secretary for Tax Policy Aviva Aron-Dine said in an official statement. “Aligning tax reporting requirements for digital assets with those for other assets will make tax filing easier and cheaper for compliant taxpayers while also helping to close the tax gap.”

The encryption industry strongly opposes it, and the privacy rights of a

large number of users may be violated

One example that is likely to be directly affected by this final rule is Uniswap Labs, which operates the decentralized exchange uniswap.org, and Uniswap Chief Legal Officer Katherine Minarik said in an X post on December 27: “Challenge this There are many approaches to (the final rule) and they should definitely be challenged.”

At the same time, encryption industry organizations Blockchain Association, DeFi Education Fund, and Texas Blockchain Council have filed lawsuits against the U.S. Department of the Treasury and the IRS. On December 28, the Blockchain Association tweeted that the U.S. Department of Revenue and the Treasury Department had exceeded their legal authority and expanded the definition of "broker" to include providers of DeFi transaction front-ends, although they do not execute transactions. This not only violates the privacy rights of individuals using decentralized technology, but also pushes the entire booming technology overseas.

Marisa Tashman Coppel, the group's legal director, said the final rule violates the Administrative Procedure Act (APA) and is unconstitutional. Even though these service providers do not execute the trades—the users do—the IRS incorrectly defines them as brokers. These software providers will be required to collect and report transaction data and personal information. These providers are not traditional intermediaries and do not have "clients" like brokers.

She argued that mandating the collection of such information raises huge privacy concerns and goes beyond the scope of the IRS's statutory authority. Moreover, the IRS did not adequately address the risks this rule poses to users, entrepreneurs, and other participants in the DeFi ecosystem. DeFi enables users to participate in a fairer financial system. But the government is now forcing the insertion of intermediaries where those intermediaries do not exist, creating more risks and unequal opportunities. We need to protect DeFi technology, not destroy it. This rule violates the APA, the Constitution, and the IRS's statutory authority. By exposing wallet addresses, it also violates the privacy rights of millions of Americans who wish to transact outside of the traditional financial system. We hope the courts will recognize this and strike down the rule.

Michele Korve, the head of supervision of a16z Crypto, a well-known crypto venture capital fund, also posted on the X platform: “We a16z Crypto believes that DeFi will make financial services and the digital economy more convenient, efficient, interoperable, reliable, and consumer-centric. However, yesterday’s release of new broker reporting rules by the U.S. Department of the Treasury poses a direct threat to this promise. , and undermines the future of DeFi innovation in the United States…DeFi builders should have confidence that industry lawyers are working hard to protect this technology and we will continue to fight on all fronts—in the courts, in Congress, and in the new administration. "

Trump administration may roll back reporting rules, but time is running

out

According to analysis by professionals, the final version of the DeFi reporting rules may be challenged by the Congressional Review Act. The bill allows Congress to repeal final rules promulgated by federal agencies within a specified period of time. The first Trump administration repealed 16 Obama-era regulations.

The key will be whether Congress considers the regulations consistent with legislation passed by Congress, and furthermore, the upcoming change of administration will overlap with the 60-day review period. However, Republicans have other priorities in 2025, such as developing a new tax package to continue the tax bill passed in 2017. Jonathan Cutler, senior manager of global information reporting at Deloitte Washington National Tax, said the repeal of cryptocurrency rules may be ignored. "Congress may not have time to deal with it because they have so many other things to do."

Some cryptocurrency-focused tax professionals are skeptical of the Internal Revenue Service’s (IRS) ability to enforce these reporting rules. For example, the agency may not even know that certain DeFi platforms exist, making auditing difficult.

On December 29, Alex Thorn, head of research at Galaxy Digital, said that if the IRS’s requirement to identify DeFi front-ends as “brokers” is not withdrawn, the DeFi industry will face three options: comply with the IRS’s reporting requirements and accept the identification of brokers, Trying to block users from the United States from smart contract upgrades and revenue generation.

At present, DeFi brokerage rules may still change with the arrival of the new Trump administration that supports cryptocurrency. PANews will pay close attention to the follow-up situation.