It is the last Friday of 2024, so naturally there's a 115-page Internal Revenue Service final rule to dig through. The Infrastructure Investment and Jobs Act mandated the IRS better define the word "broker" as it relates to digital asset services. The IRS published a document which creates definitions and rules around these activities.

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A broker by any other name?

The narrative

The IRS published a final rule which seems to mandate a large chunk of crypto entities — including decentralized finance entities — to conduct know-your-customer data on users.

Why it matters

This final rule follows months of back-and-forth between the IRS and the general public, after the IRS' initial proposal received some amount of pushback. Still, the final rule published Friday imposes a number of obligations on "digital assets middlemen," which refers to "any person who is responsible for providing an effectuating service" — in other words, any service that provides a trading front-end or would otherwise have an operator who has some control over the service and can know how the transactions are being facilitated.

Breaking it down

The IRS' proposal appears to require that any entity that might facilitate a crypto transaction collect information about the transaction's participants if they meet the definition of a "digital asset middleman."

"A person providing trading front-end services ordinarily would know or be in a position to know the nature of the transaction potentially giving rise to gross proceeds from a sale of digital assets if that person maintains control or sufficient influence over the trading front-end services to have the ability to determine whether and the extent to which the transfer of digital assets involved in a transaction gives rise to gross proceeds," the rule said.

This includes any person who has the ability to amend or change "the terms under which the services are provided," or can add instructions soliciting information from the transaction processing.

Less clear is how exactly developers who aren't themselves operating any services might be affected, Coin Center said in a blog post.

"Today’s final rule could still obligate mere developers and infrastructure providers to surveil and report on the users of their tools," the blog post said.

These obligations may be impossible to comply with for certain developers, Coin Center suggested in the post.

"So if you add immutable encryption-based restrictions to your software that protect the privacy of your software users and also prevent you from being in a position to know their transactions, you will still be obligated as a broker to learn the identity of the users of your software and report the details of their trades," the blog post said. "This is, in effect, a prohibition on building software tools that empower and protect users."

Miles Fuller of TaxBit said on LinkedIn that validators and wallet service providers are carved out, unless the wallet service providers are also providing effectuating services.

I imagine this won't be the last we hear about this rule in the months ahead.

Stories you may have missed

Coinbase CEO, Other Crypto Insiders Billions Richer After Seeking to Steer Elections: Jesse Hamilton dug through filings and stock sale disclosure reports for the third part of his ongoing series about the crypto industry's financial involvement in the 2024 election. The CEOs of the companies which donated heavily to Fairshake and other crypto political action committees have benefited financially, based on price movements and other data from the past month.

Do Kwon's U.S. Extradition Gets Okay From Montenegro's Justice Minister: Do Kwon's extradition has gone back and forth between the U.S. and South Korea so many times it's hard to know for sure whether this is the final word. But it sure looks like he may be sent to the U.S. to face charges.

This week

Wednesday

It is Christmas and the first day of Hanukkah

Thursday

It is the first day of Kwanzaa

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Bluesky @nikhileshde.bsky.social.

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See ya’ll next week!