The US Internal Revenue Service’s (IRS) new regulations classifying certain decentralized finance (DeFi) protocols as brokers have been met with widespread criticism from the crypto industry, with many calling for the incoming Congress to overturn the rules.
New Regulations Define DeFi Protocols as Brokers
The IRS disclosed the new regulations on December 27, which treat front-end protocols facilitating digital asset transactions as brokers, requiring Know Your Customer disclosures of transactions. According to the agency, the regulations will affect up to 875 DeFi brokers and potentially impact 2.6 million taxpayers.
Industry Reaction
The new rules have sparked a backlash on social media, with many legal experts suggesting that the IRS may be overstepping its authority and infringing constitutional rights. Jake Chervinsky, chief legal officer at Variant, called the rule “unlawful” and urged the incoming administration to strike it down. Alexander Grieve, vice-president of government affairs at Paradigm, suggested that the new Congress can roll back the regulations via the Congressional Review Act (CRA) process.
Definition of DeFi Brokers
The DeFi broker definition encompasses platforms performing intermediary functions in facilitating transactions, including groups of persons facilitating transactions “whether or not the group operates through a legal entity.” Miles Jennings, general counsel of a16z Crypto, claimed that the rule represents “a fantastical expansion” of the words “effectuate transactions” to enable the IRS to ban DeFi.
Exclusions and Implications
According to Miles Fuller, director of government solutions at TaxBit, the definition covers any provider that knows “or is in a position to know” whether the nature of the transaction involved gives rise to reportable gross proceeds from the sale of digital assets. Validation services and wallet software providers are specifically excluded from the definition. The Blockchain Association called the rule “a final attempt” to send the US crypto industry offshore and vowed to take aggressive action to fight back.
Next Steps
The crypto industry is expected to work with the new Congress and Administration to roll back the regulations. The Congressional Review Act allows Congress to review and potentially disapprove of regulations issued by agencies like the IRS.
Source: Cointelegraph.com