Today, the IRS issued a new tax reporting rule requiring certain decentralized finance (DeFi) brokers to collect user transaction information and provide clients with 1099 tax forms (used to report non-employee compensation income). This controversial regulation has sparked strong opposition from the cryptocurrency industry, particularly amid rising concerns over privacy and compliance.
According to the new regulations, DeFi brokers engaging in digital asset transactions with clients must report the total gains from their digital asset sales and collect users' personal information, including names and addresses. This requirement is similar to the reporting obligations of traditional securities brokers, indicating that DeFi platforms face significant pressure regarding compliance.
The IRS defines 'DeFi brokers' primarily as front-end service providers that interact directly with users, such as decentralized exchanges (DEX). The regulations apply to entities that provide access to DeFi protocols' main websites, rather than to the developers or operators of the DeFi protocols themselves.
It is reported that this IRS policy is expected to take effect on January 1, 2027, or later, potentially impacting 2.6 million taxpayers and 875 DeFi brokers. This means that a wide range of users and platforms will be affected by this compliance requirement.
Once the new regulations were announced, opposition from the cryptocurrency industry immediately arose. Many industry experts and legal advisors pointed out that cryptocurrencies are fundamentally different from traditional assets, and that DeFi operates in a completely different manner from traditional finance, especially in establishing information collection and reporting mechanisms. DeFi service providers face far greater technical and compliance challenges than traditional financial institutions.
At the same time, privacy rights are a major concern for many opponents. There is broad consensus that this new regulation will severely infringe on users' privacy rights and increase the risk of user information leaks. Bill Hughes, the global regulatory affairs director for Consensys, the parent company of Metamask, even stated that the industry might sue over the rule, arguing that it exceeds the Treasury Department's authority and violates the Administrative Procedure Act. He also pointed out that the Trump Congress could potentially review and veto this rule.
In addition, many participants believe this rule represents a peculiar expansion of the term 'transaction realization,' suggesting that the IRS may have the authority to prohibit certain DeFi activities. This could ultimately lead to the closure of some small DeFi platforms, thereby impacting the healthy development of the entire market. This illegal rule is viewed as a 'last gasp' of the anti-crypto forces of the Biden administration as they lose power and must be overturned by courts or future governments.
As opposition grows, some lawmakers are beginning to call for Congress to take action to block the implementation of this new regulation. Alexander Grieve, vice president of the investment firm Paradigm, stated that pro-cryptocurrency members of Congress should use the Congressional Review Act (CRA) next year to overturn these regulations, a process often used to nullify certain actions by federal agencies.
Moreover, some analysts believe that Trump's return could change the current policy direction. During his presidency, Trump held a relatively lenient attitude towards cryptocurrencies, supporting innovation and development. If he is elected again, he may reassess the current compliance pressures and regulatory requirements, which could subsequently influence the development of the DeFi industry.
In summary, the IRS's new regulations present new challenges for the DeFi industry. Although there are many opposing voices within the industry, there remains uncertainty about whether this policy will be implemented in the future political and legislative environment. Industry participants hope for future legislative changes, and some even hope that a return of the Trump administration could halt the implementation of this policy. As the effective date of the new regulations approaches in 2027, how the future of the cryptocurrency industry will evolve is worth our close attention.