The IRS has introduced new regulations requiring decentralized finance (DeFi) brokers to collect and report user transaction data, including total gains from digital asset transactions, aimed at strengthening tax compliance in the emerging DeFi sector.

Under the updated rules, DeFi brokers must provide clients with Form 1099-DA, which contains key details of the transactions, such as names, wallet addresses, and transaction amounts. This puts DeFi service providers on par with traditional securities brokers in terms of tax reporting obligations, representing a significant shift in regulatory oversight.

The regulations clarify that brokers responsible for recording total gains to the customer's wallet address or account are also required to report that transaction. This practice echoes the existing framework for securities brokers, ensuring that each transaction is reported by only one broker, thereby simplifying the reporting process and reducing potential errors.

While the final regulations do not require reporting transaction timestamps or wallet address information, brokers still need to retain this data for seven years for IRS inspection. The new Form 1099-DA will be used to report this information, providing taxpayers with the necessary details to accurately include gains from digital asset transactions in their income.

The IRS's decision to implement these regulations underscores its commitment to improving tax compliance in the rapidly evolving DeFi sector, where traditional financial norms are being challenged and redefined. Including non-custodial wallets (also known as cold wallets or self-custody wallets) in the definition of brokers has been a controversial issue, as it may broaden the scope of what should be classified as brokers.

Key points of the final regulation

  • Form 1099-DA: Brokers are required to use this form to report gains from the disposition of digital assets, including cryptocurrencies, NFTs, and stablecoins.

  • Broker classification: Brokers need to specify their type, such as self-service terminal operators, digital asset payment processors, custodial wallet providers, non-custodial wallet providers, or other digital asset reporters.

  • Transaction data: Mandatory transaction data includes sale transaction ID (TxID), digital asset address, and sale unit quantity. Transfer-related data points include transfer in TxID number, transfer in digital asset address, and transfer in unit quantity.

  • Data retention: Brokers are obligated to retain transaction data for seven years for IRS inspection.

  • Effective date: The regulations will take effect 60 days after being published in the Federal Register, with reporting of these transactions expected to begin in January 2026.

KYC is also required when using DeFi platforms

The IRS's new regulations present significant challenges for DeFi platforms, which typically operate in highly decentralized and anonymous environments. The requirements for centralized reporting and KYC (Know Your Customer) practices may force certain segments of DeFi to either centralize or relocate overseas to evade compliance burdens. Nevertheless, through appropriate compliance strategies and a focus on privacy-preserving technologies, DeFi platforms can still navigate this evolving regulatory landscape while adhering to their core principles.

The IRS will align cryptocurrency tax reporting requirements with those for other assets, aiming to streamline and reduce compliance costs for taxpayers while helping to narrow the tax gap. As Deputy Assistant Secretary for Tax Policy Aviva Aron-Dine stated: "These regulations will ensure that all taxpayers operate under the same rules and have access to the information necessary for accurate reporting."

"Does DeFi also need KYC? The IRS requires DeFi brokers to report user transaction data" was originally published by (Blockbeat).