• Crypto coalition sues IRS, claiming new broker rules could drive DeFi offshore by 2027.

  • IRS rule could affect 765 DeFi brokers, impacting 2M U.S. taxpayers.

  • Blockchain groups argue IRS overstepped with broker rules under 2021 Infrastructure Act.

The Blockchain Association, the DeFi Education Fund, and the Texas Blockchain Council have sued the Internal Revenue Service (IRS) and the U.S. Treasury. This legal action concerns the recently adopted broker rule that warrants new reporting obligations for DeFi protocols and wallets. The coalition claims that it is over-regulation and unconstitutional.

https://twitter.com/BlockchainAssn/status/1872857085177937973 IRS Defends Rule as Necessary for Tax Compliance

The IRS rule, effective in 2027, requires DeFi front-ends to gather and report user data, like identity and transaction records. This regulation is based on the 2021 Infrastructure Investment and Jobs Act. Notably, it has extended the reporting requirements to include digital assets.

As per the IRS, the rule is set to reduce the tax compliance gap by monitoring DeFi activities. The agency predicts the rule could affect around 765 DeFi brokers and two million US taxpayers. Some critics contend that the rule is disadvantageous to DeFi protocols. This is because they have a different operating model from financial systems. In contrast to the centralized platforms, using decentralized finance smart contacts allows the user to control the assets without intermediaries.

The IRS also argued that more transparency is required in presenting digital asset transactions for tax regulations in the market. Nonetheless, the regulation has received widespread skepticism from industry players who have raised practicality concerns and possible adverse impacts on the US crypto sector.

IRS Regulation Criticised

According to the Blockchain Association’s legal team, imposing DeFi protocols to provide reporting information similar to brokers would challenge the decentralization of these platforms. They have also argued that the rule infringes on an individual’s right to privacy and could lead to innovation outsourcing.

The legal action was filed in the U.S. District Court of the Northern District of Texas, accusing the IRS and the Treasury of overstepping their mandate by using the Administrative Procedure Act. The plaintiffs also argue that the rule's definition of “broker” is overbroad, violating the constitutional rights of users and firms in decentralized technologies.

Lee Bratcher, the president of the Texas Blockchain Council, argued that such regulations risk suppressing innovation in the U.S. He urged the court to vacate the rule. Speaking with the media, Marisa Coppel, head of legal at the Blockchain Association, highlighted the requirements could push the emerging DeFi industry out of the country.

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