Will this new regulation pose challenges for users participating in the DeFi market in 2027?
On July 9, 2024, the U.S. Department of the Treasury issued final regulations requiring custodial brokers to report transaction information for assets they manage on behalf of their clients. Additionally, they warned that similar regulations would be applied to non-custodial brokers in the future.
The IRS has classified DeFi projects as brokers for tax reporting purposes. Source: U.S. Department of the Treasury.
On December 27, 2024, the U.S. Department of the Treasury officially announced regulations applicable to DeFi, focusing on trading front-end services that enable individual investors to interact with DeFi protocols.
According to the plan, these regulations will take effect on January 1, 2025. Starting in 2027, brokers will be required to disclose information on the total proceeds from the sale of cryptocurrencies and other digital assets, including details related to taxpayers involved in such transactions.
The IRS has analyzed DeFi operations into three distinct layers:
Interface Layer: Where users interact directly, such as trading applications or digital wallets.
Application Layer: Where transaction logic is processed, such as smart contracts or DeFi protocols.
Settlement Layer: Where actual transactions are executed and recorded on the blockchain.
Although there have been objections arguing that applying traditional securities trading models as a reference is inappropriate due to the significant differences between DeFi and securities trading, the IRS maintains that this model is useful in understanding and defining the fundamental steps of transactions.
The IRS is responsible for collecting taxes and enforcing tax laws in the United States. Source: Investopedia.
According to the IRS, these regulations simply treat DeFi like any other industry, asserting that similar rules have been applied to brokers for over 40 years.
"The Treasury Department and the IRS disagree with the notion that these final regulations show bias against the DeFi industry or that they will discourage the adoption of this technology by law-abiding customers."
-- The IRS stated that... --
The new regulations will apply to digital asset transactions starting in 2027. Brokers will be required to begin collecting and reporting necessary data for digital asset transactions starting in 2026. According to the IRS, between 650 and 875 DeFi projects are expected to be affected by these regulations.
"Reporting information by DeFi brokers under Section 6045 will lead to higher tax compliance, as income earned from digital asset transactions of taxpayers not routed through custodial brokers will become more transparent to both the IRS and the taxpayers."
-- The IRS emphasized that... --
The IRS only applies the reporting obligation to parties that are actually able to collect and provide useful transaction information, such as front-end trading platforms. Other parties that cannot or do not have access to important information will be exempt from this obligation.
Some users on X believe that the new regulations will make it more complicated to participate in the crypto market. They are concerned that transaction processes will be burdened with more regulations, and the requirement to pay taxes will add financial and procedural burdens. This could make participating in the market less straightforward, especially for individual users.
Altcoin market. Source: CryptoBubbles.
The altcoin market also reacted negatively to this news, with most projects experiencing a slight decline.
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