Today, the IRS announced 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 about privacy and compliance.
According to the new regulations, DeFi brokers conducting digital asset transactions with clients must report the total earnings 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, implying that DeFi platforms face enormous pressure in terms of compliance.
The IRS-defined "DeFi brokers" primarily refer to those front-end service providers that interact directly with users in trading activities, such as decentralized exchanges (DEX). The regulations apply to entities that provide access to the main websites enabling users to access DeFi protocols, rather than the developers or operators of the DeFi protocols.
It is reported that this IRS policy is expected to take effect on or after January 1, 2027, 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 released, 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 way from traditional finance, especially in establishing information collection and reporting mechanisms. The technical and compliance challenges faced by DeFi service providers are far greater than those faced by traditional financial institutions.
At the same time, privacy rights are the primary concern for many opponents. There is widespread sentiment that this new regulation will severely infringe on users' privacy rights, increasing the risk of user information leakage. Among them, Bill Hughes, the global regulatory affairs director of Consensys, the parent company of Metamask, even stated that the industry might sue over this rule, claiming it exceeds the powers of the Treasury Department and violates the Administrative Procedure Act. He also pointed out that a Trump-led Congress might review and reject this rule.
Furthermore, many participants believe this rule represents a peculiar expansion of the term "trading realization," meaning the IRS may have the power to prohibit certain DeFi activities. Ultimately, this could lead to the closure of some small DeFi platforms, affecting the healthy development of the entire market. This illegal rule is seen as the "death throes" of the anti-crypto forces of the Biden administration as they lose power and must be overturned by the courts or future governments.
As opposition grows, some legislators have begun to call on Congress to take action to stop the implementation of this new regulation. Alexander Grieve, vice president of venture capital firm Paradigm, stated that pro-cryptocurrency members of Congress should use the Congressional Review Act (CRA) next year to overturn these regulations, a process commonly used to reverse certain actions by federal agencies.
Moreover, some analysts believe that Trump's return could change the current policy direction. During his presidency, Trump had a relatively lenient stance on cryptocurrencies, supporting innovation and development. If he is elected again, he may reassess the current compliance pressures and regulatory requirements, thereby impacting the development of the DeFi industry.
In summary, the new IRS regulations pose new challenges for the DeFi industry. Although there is significant opposition from the industry, the uncertainty remains regarding whether this policy can be implemented in the future political and legislative environment. At the same time, industry participants hope for changes in future legislation, and even hope that a return of the Trump administration could prevent the implementation of this policy. As the effective date of the new regulations in 2027 approaches, it is worth closely monitoring how the future of the cryptocurrency industry will evolve.