Author: Weilin, PANews
On December 27, local time, the U.S. Department of the Treasury and the IRS released the 'DeFi Broker' final rule document, which has sparked widespread criticism from the crypto industry. It requires DeFi brokers to report digital asset sales revenue and collect user KYC information starting in 2025.
The rules will officially take effect 60 days after publication. However, the document also notes that a transition period will occur between 2025 and 2026, during which some degree of leniency may be granted, but the specific scope and criteria for leniency remain unclear. After the grace period, the new rules will apply to digital asset sales starting in 2027, with brokers required to begin collecting and reporting the necessary data for digital asset transactions from 2026.
Crypto industry insiders point out that in 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 raise significant privacy infringement issues and exceeds the statutory authority of the IRS. Some analysts believe that Trump may revoke the reporting rules, but due to the overlap between the effective date after 60 days and the new administration's inauguration (January 20), Republicans may be occupied with other priorities. The new rules may force DeFi service providers to exclude U.S. users from their services.
'DeFi broker' final rules require brokers to report total revenue and user information.
This document from the U.S. Department of the Treasury and the IRS is titled 'Regular Reporting of Total Revenue of Brokers Facilitating Digital Asset Sales', with a previous version released in August 2023 that initiated a public comment collection process, receiving 44,000 feedback comments. This time, the final rules, spanning 115 pages, require DeFi brokers to provide clients with 1099 forms, collecting user transaction information, including names and addresses. Additionally, the report includes the total revenue obtained from clients disposing of digital assets in certain sales or exchange transactions.
According to the document, if a DeFi platform facilitates the exchange or sale of digital assets (even through smart contracts) and exerts sufficient control or influence over the transaction process, it may meet the definition of a broker. The U.S. Department of the Treasury noted that the final rules apply to 'front-end service providers' that interact 'directly with customers', meaning the operating entities of major websites used to access decentralized protocols, rather than the protocols themselves.
In the document, the IRS has categorized the DeFi ecosystem into three distinct layers:
Interface Layer: Includes user-facing components such as screens, buttons, forms, and other visual elements found in websites, mobile applications, and browser extensions. This layer facilitates 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 a distributed ledger, including transactions conducted via DeFi protocols.
The IRS believes that only the interface layer, specifically 'front-end trading services', will be considered 'brokers'. The basic principle is that front-end trading services have the closest relationship with customers, allowing them to obtain customer KYC (Know Your Customer) information and report related data to the IRS. The IRS states that front-end trading services include websites that allow users to exchange digital assets through their interfaces, non-custodial wallets, and browser extensions. (Unhosted wallets, which are only used for managing private keys, do not fall under the broker category.)
Much of the document outlines the comments received and definitions of many foundational concepts, as well as the views of the two government agencies—the Treasury Department and the IRS—who believe that 'DeFi brokers' should follow the same rules as brokers handling traditional securities. The document also states that 'the Treasury Department and the IRS disagree that the final rules reflect a bias against the DeFi industry and also disagree that these rules would hinder compliant customers from adopting this technology.'
According to IRS estimates, between 650 and 875 DeFi brokers will be affected by these final rules.
'According to Section 6045, the information reporting by DeFi brokers will enhance taxpayers' own compliance, as the income earned by taxpayers participating in digital asset transactions without a custodial broker will be more transparent to the IRS and the taxpayers themselves.' The IRS estimates that the new rules will affect up to 2.6 million taxpayers.
'These rules will help ensure that all taxpayers follow the same rules and can access the information they need to file their taxes accurately,' said Aviva Aron-Dine, the acting assistant secretary for tax policy, in an official statement. 'Aligning the tax reporting requirements for digital assets with those for other assets will make it easier and cheaper for compliant taxpayers to file their taxes, while also helping to narrow the tax gap.'
The crypto industry strongly opposes it, and a large number of users' privacy rights are at risk of being infringed.
One example that is likely to be directly affected by this final rule is Uniswap Labs, which operates the decentralized exchange uniswap.org. Uniswap's chief legal officer, Katherine Minarik, stated in a post on X on December 27: 'There are many ways to challenge this (final rule), and it absolutely should be challenged.'
Meanwhile, crypto industry organizations such as the Blockchain Association, DeFi Education Fund, and Texas Blockchain Council have already filed lawsuits against the U.S. Department of the Treasury and the IRS. On December 28, the Blockchain Association tweeted that the IRS and Treasury have exceeded their statutory authority by expanding the definition of 'broker' to include providers of DeFi transaction frontends, even though they do not execute transactions. This not only infringes on the privacy rights of individuals using decentralized technologies but also pushes the entire thriving technology overseas.
The organization's legal head, Marisa Tashman Coppel, stated that the final rules violate the Administrative Procedure Act (APA) and are unconstitutional. Even if these service providers do not execute transactions—users are the ones executing transactions—the IRS incorrectly defines them as brokers. These software providers will need to collect and report transaction data and personal information. These providers are not traditional intermediaries and do not have 'clients' like brokers do.
She believes that the mandatory collection of such information raises significant privacy issues and exceeds the statutory authority of the IRS. Furthermore, the IRS has not adequately addressed 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 forcibly inserting intermediary roles where none exist, thus creating more risks and unequal opportunities. We need to protect DeFi technology, not destroy it. This rule violates the APA, the Constitution, and the statutory authority of the IRS. By exposing wallet addresses, it also infringes on the privacy rights of millions of Americans who wish to transact outside the traditional financial system. We hope the court will recognize this and nullify the rule.
Michele Korve, the head of regulation for the well-known crypto venture capital fund a16z Crypto, also stated on the X platform: 'We at a16z Crypto believe that DeFi will make financial services and the digital economy more convenient, efficient, interoperable, reliable, and consumer-centric. However, yesterday the U.S. Department of the Treasury released new broker reporting rules, which pose a direct threat to this commitment and undermine the future of DeFi innovation in the United States... DeFi builders should be confident that industry lawyers are working hard to protect this technology. We will continue to fight on all fronts—in court, in Congress, and with the help of the new administration.'
The Trump administration may revoke the reporting rules, but time is of the essence.
According to professionals' analysis, the final version of the DeFi reporting rules may be challenged under the Congressional Review Act. This act allows Congress to overturn final rules issued by federal agencies within a specific timeframe. The first Trump administration had repealed 16 regulations from the Obama era.
The key question is whether Congress believes these regulations are consistent with the legislation passed by Congress, and additionally, the upcoming government transition will overlap with the 60-day review period. However, the Republicans have other priorities in 2025, such as formulating a new tax plan to extend the tax law passed in 2017. Jonathan Cutler, a senior manager for global information reporting at Deloitte Washington National Tax, stated that the repeal of cryptocurrency rules might be overlooked. 'Congress may not have time to address this because they have too many other things to do.'
Some tax professionals focused on cryptocurrencies are skeptical about the IRS's ability to enforce these reporting rules. For example, the agency may not even be aware of the existence of certain DeFi platforms, making audits difficult.
On December 29, Galaxy Digital's research director Alex Thorn stated that if the IRS does not withdraw the rule classifying DeFi frontends as 'brokers', the DeFi industry will face three options: comply with IRS reporting requirements and accept broker classification, attempt to block U.S. users, or abandon smart contract upgrades and revenue generation.
Currently, the DeFi broker rules may still change with the arrival of the new Trump administration that supports cryptocurrencies. PANews will closely monitor the subsequent developments.