The IRS' stated goal is to increase tax compliance by reducing the tax gap associated with digital assets. The agency said the new rules help identify taxpayers and reduce errors in tax returns.
IRS, US Internal Revenue Service.
With just four days remaining until the end of 2024, the Internal Revenue Service (IRS), the agency responsible for tax collection and tax oversight in the United States, has published a new regulation that directly impacts the decentralized finance (DeFi) sector.
The rule published on the official US government website requires DeFi platforms to implement user identity (KYC) procedures by 2027.
According to the document, front-end trading service providers will be required to collect identifying information from users, report cryptocurrency and NFT holdings to tax authorities, and restrict services to those that do not comply with the new rules.
The regulation defines a “front-end trading service” as any platform that “receives and processes digital asset sales orders for execution.”
While it does not directly name any DeFi platforms, the definition encompasses decentralized exchanges such as Uniswap, PancakeSwap, and other interfaces that connect users to the digital asset market.
P2P
Regulation may affect P2P (peer-to-peer) operations, depending on how these transactions are brokered.
According to the 115-page document, the expanded definition of “broker” includes any entity that provides services that facilitate the transfer of digital assets to another person.
If a P2P seller acts as a regular intermediary, facilitating the connection between buyers and sellers or executing the transactions, they may qualify as a broker under the new rules.
However, completely direct transactions between two parties, without the intermediation of a third party or platforms connecting these parties, may not be affected, as the regulation is focused on structured services that process or facilitate sales on a regular basis.
IRS closing in on DeFI
The IRS' stated goal is to increase tax compliance by reducing the tax gap associated with digital assets. The agency said the new rules help identify taxpayers and reduce errors in tax returns.
Digital asset brokers, defined as those who act as intermediaries in digital asset transactions, are now required to file disclosure statements that include gross proceeds and, in some cases, adjusted basis from transactions.
This applies to all types of digital assets, which are considered property for federal tax purposes.
According to the IRS, the regulations are intended to increase tax compliance and reduce evasion by reminding taxpayers that digital asset transactions are taxable and must be reported on their income tax returns.
The IRS noted that enforcing the reporting rules will help close the unreported income gap, which is larger for digital assets compared to other types of income.
The IRS stated that the new rules do not reflect a bias against the DeFi industry, but rather an attempt to align reporting demands with those of traditional financial services.
“The Treasury Department and the IRS do not agree that these final regulations reflect a bias against the DeFi industry or that these regulations will discourage the adoption of this technology by law-abiding customers,” the document reads.
Finally, the new regulations will come into effect for transactions carried out on or after January 1, 2025.