• The lawsuit alleges IRS’s new DeFi tax rules violate the Administrative Procedure Act, imposing unlawful compliance burdens.

  • The regulation requires DeFi platforms to record user transaction data and supply it to the IRS.

  • Ongoing legal challenges could influence U.S. Treasury's view on DeFi regulation under the new administration.

The DeFi Education Fund has filed a case against the United States Internal Revenue Service (IRS) in its newly released tax for decentralized finance. The group pointed the lawsuit less than 24 hours after the IRS revealed the law, condemning the agency. 

Lawsuit Alleges Violation of Administrative Procedure Act

The challenge claims that the IRS’s tax violates the Administrative Procedure Act (APA). During the rule’s public comment period, multiple stakeholders advised the agency against finalizing the regulation, citing potential harm to innovation and undue burden on developers.

The DeFi Education Fund stated that the rules compel developers of trading front-end services to implement complex compliance measures, including user transaction record-keeping. The group warned that such requirements could hinder technological progress and stifle entrepreneurial efforts within the United States.

Compliance Obligations and Developer Impact

The new regulation mandates that DeFi trading front-end service providers record detailed user transaction information and supply it to the IRS upon request. Additionally, users are required to submit Form 1099 for tax reporting. 

Critics argue that these compliance requirements disproportionately affect software developers by imposing responsibilities unrelated to their core functions. The DeFi Education Fund contended that these rules would introduce unnecessary operational burdens, complicating efforts to foster innovation within the sector.

Historical Criticism of IRS Crypto Policies

The IRS has faced ongoing criticism from the crypto industry over its approach to digital asset taxation. In an earlier case involving staking rewards, the agency classified such earnings as taxable upon receipt, sparking another legal challenge. 

Separately, the Digital Chamber flagged privacy concerns linked to specific tax policies, citing potential overreach. Observers have noted the IRS’s push to establish regulatory frameworks before an incoming administration takes office.

As legal challenges mount, attention has shifted to Treasury Secretary nominee Scott Bessent, whose stance on these policies remains unclear. The resolution of these lawsuits is expected to significantly influence the future of DeFi regulation in the U.S.

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