Three cryptocurrency industry groups, including the DeFi Education Fund, the Blockchain Association, and the Texas Blockchain Council, are suing the IRS, hoping to prevent the IRS from requiring decentralized finance (DeFi) operators or institutions to report client data under the new regulations.
Previously, the Congressional Budget Office had finalized cryptocurrency taxation regulatory rules as part of the Biden administration's "Infrastructure Investment and Jobs Act." The IRS stated that these new regulations should help "narrow the information gap in digital assets."
These regulations require DeFi brokers to provide clients with a 1099-DA form, which includes key details of cryptocurrency transactions, such as name, wallet address, and transaction amount. This treats DeFi service providers as having the same tax reporting obligations as traditional securities brokers. Additionally, the regulations require brokers responsible for recording total revenue to the client's wallet address or account to also be responsible for reporting that transaction.
These controversial regulations are expected to take effect in 2027, at which time some DeFi front-end operators will be required to collect users' personal information and transaction history.
However, the three crypto industry groups argue in their lawsuit against the IRS that the aforementioned practices place an excessive burden on "DeFi transaction front-ends," which are essentially online platforms that allow users to use cryptocurrency protocols but do not necessarily constitute "substantive transactions." The lawsuit points out:
Unlike traditional finance, DeFi does not rely on intermediaries like brokers. The custody of digital assets is maintained by the users themselves, who trade with each other using software.
This lawsuit argues against defining these front-end transactions as brokers, partly because "there are simply no entities like brokers among the participants in DeFi transactions."
Marisa Coppel, head of legal affairs at the Blockchain Association, stated in a press release that the new regulations "violate the privacy rights of individuals using decentralized technology" and would drive this emerging technology overseas.
This lawsuit claims that the nature of DeFi should be exempt from reporting requirements and that implementing new regulations would be an overreach, potentially "effectively ending the DeFi industry."
Lee Bratcher, chairman of the Texas Blockchain Council, stated:
This regulation poses a risk of driving capital development overseas, threatening the competitiveness of the U.S. in the digital economy.
According to the IRS's own estimates, this regulation could affect "about 650 to 875 DeFi brokers, with a median of about 765 DeFi brokers." The IRS also roughly estimates that the new regulations will impact about 2 million U.S. taxpayers.
"Opposition to the new requirement for DeFi operators to report client data! 'Three major crypto groups' join forces to sue the IRS" This article was first published in (Blockcast).