Article reproduced from: Weilin
Author: Weilin, PANews
On December 27, local time, the U.S. Treasury and the IRS released the 'DeFi Broker' final rule document, which sparked widespread criticism from the cryptocurrency industry, requiring DeFi brokers to report digital asset sales revenue and collect user KYC information starting in 2025.
The regulations will officially take effect 60 days after publication. However, the document also notes that there will be a transition period from 2025 to 2026 during which some degree of leniency may be granted, although the specific range and criteria for leniency are not yet clear. After the grace period, the new regulations will apply to sales of digital assets starting in 2027, and brokers will need to begin collecting and reporting the data required for digital asset transactions starting in 2026.
Industry insiders pointed out that in practice, it is users who facilitate transactions, and the IRS’s erroneous classification of DeFi service providers as brokers, forcing them to collect user information, will raise significant privacy violation issues and exceed the statutory authority of the IRS. Some analysts believe that Trump may revoke the reporting rules, but due to the overlap of the effective date 60 days later with the new government taking office (January 20), Republicans may be busy with other priorities. The new regulations may force DeFi service providers to exclude U.S. users from their services.
'DeFi Broker' final rules require reporting total revenue and user information of brokers.
This document from the U.S. Treasury and IRS is titled 'Periodic Reporting of Total Revenue of Brokers Facilitating Sales of Digital Assets'. The previous version was published in August 2023 and opened a process for gathering public comments, receiving 44,000 pieces of feedback. This time, the 115-page final rule requires DeFi brokers to provide clients with Form 1099, collecting user transaction information, including names and addresses. Additionally, it reports the total revenue obtained from the disposal of digital assets for clients in certain sales or exchange transactions.
According to the document, if a DeFi platform participates in facilitating 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. Treasury notes that the final rule applies to 'front-end service providers' that interact 'directly with customers,' meaning the operating entities of the main websites used to access decentralized protocols, rather than the protocols themselves.
In the document, the IRS has divided the DeFi ecosystem into three independent layers:
Interface Layer: Includes user-facing components, such as screens, buttons, forms, and other visual elements in websites, mobile apps, 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 made through DeFi protocols.
The IRS believes that only the interface layer, specifically 'front-end trading services', will be regarded as 'brokers'. The basic principle is that front-end trading services have the closest relationship with customers, and therefore can obtain customers' KYC (Know Your Customer) information and report relevant data to the IRS. The IRS states that front-end trading services include websites that allow users to exchange digital assets through their interface, non-custodial wallets, and browser extensions. (Non-custodial wallets used solely for managing private keys do not fall under the category of brokers.)
Much of the document outlines the comments received and definitions of many foundational concepts, as well as the perspectives of the Treasury and IRS, who believe that 'DeFi brokers' should follow the same rules as traditional securities brokers. The document also states, 'The Treasury and IRS disagree that the final regulations reflect bias against the DeFi industry, nor do they agree that these regulations will hinder law-abiding customers from adopting this technology.'
According to the IRS estimates, between 650 to 875 DeFi brokers will be affected by these final regulations.
'According to Section 6045, the information reporting of DeFi brokers will enhance taxpayers' compliance, as taxpayers participating in digital asset transactions without a custodial broker will have their earnings become more transparent to both the IRS and the taxpayer.' The IRS estimates that the new regulations will affect up to 2.6 million taxpayers.
'These regulations will help ensure that all taxpayers follow the same rules and can obtain the information they need to file their taxes accurately,' said Aviva Aron-Dine, 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 close the tax gap.'
The cryptocurrency industry strongly opposes this, as a large number of users’ privacy rights may be violated.
One example likely to be directly impacted by this final rule is Uniswap Labs, which operates the decentralized exchange uniswap.org. Uniswap's Chief Legal Officer Katherine Minarik stated in an X post on December 27: 'There are many ways to challenge this (final rule), and it should absolutely be challenged.'
Meanwhile, cryptocurrency industry organizations such as the Blockchain Association, DeFi Education Fund, and Texas Blockchain Council have already filed lawsuits against the U.S. Treasury and IRS. On December 28, the Blockchain Association tweeted that the IRS and Treasury have overstepped their statutory authority by expanding the definition of 'broker' to include providers of DeFi transaction front ends, even though they do not execute trades. This not only infringes on the privacy rights of individuals using decentralized technology but also pushes the entire thriving technology offshore.
The organization's legal head, Marisa Tashman Coppel, stated that the final rule violates the Administrative Procedure Act (APA) and is unconstitutional. Even if these service providers do not execute trades—users do—the IRS incorrectly classifies 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 'customers' in the same way brokers do.
She believes that the forced collection of such information raises significant privacy issues and exceeds the IRS's statutory authority. Moreover, the IRS has not adequately addressed the risks posed by this rule to users, entrepreneurs, and other participants in the DeFi ecosystem. DeFi enables users to participate in a more equitable financial system. But the government is now forcibly inserting intermediaries that do not exist, thereby creating more risks and unequal opportunities. We need to protect DeFi technology rather than destroy it. The rule violates the APA, the Constitution, and the IRS's statutory authority. By exposing wallet addresses, it also infringes on the privacy rights of millions of Americans wishing to transact outside of the traditional financial system. We hope the courts will recognize this and repeal the rule.
Michele Korve, the regulatory head of the well-known crypto venture capital fund a16z Crypto, also posted on X, stating: 'We at a16z Crypto believe DeFi will make financial services and the digital economy more accessible, efficient, interoperable, reliable, and consumer-centric. However, yesterday, the U.S. Treasury issued new broker reporting rules, which pose a direct threat to this promise and undermine the future of DeFi innovation in the U.S.... DeFi builders should have confidence that industry lawyers are working 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 repeal final rules issued by federal agencies within a specific timeframe. The first Trump administration repealed 16 regulations from the Obama era.
The key is whether Congress believes these regulations are consistent with the legislation passed by Congress, in addition to the upcoming government transition overlapping with the 60-day review period. However, the Republicans have other priorities in 2025, such as developing a new tax plan to extend the tax law enacted in 2017. Jonathan Cutler, Senior Manager of Global Information Reporting at Deloitte Washington National Tax, stated that the repeal of cryptocurrency rules may be overlooked. 'Congress may not have time to deal with it 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 its regulations classifying DeFi front ends as 'brokers', the DeFi industry will face three options: comply with the IRS reporting requirements and accept the broker classification, attempt to block users from the U.S., or abandon smart contract upgrades and revenue generation.
At present, the DeFi broker rules may still change with the arrival of a new Trump administration that supports cryptocurrencies. PANews will closely monitor the follow-up situation.