These regulations primarily target 'front-end service providers' for trading, such as decentralized exchanges (DEX) that facilitate digital asset trading. According to the IRS, these platforms serve as intermediaries, and classifying them as brokers will help ensure tax compliance.
Article author: Abdulaziz Fathi
The IRS has issued final regulations requiring brokers to report digital asset transactions, incorporating decentralized finance (DeFi) platforms into the existing tax framework.
The rule will take effect in 2027 and will require brokers to disclose transaction details, including total earnings and taxpayer information.
These regulations primarily target 'front-end service providers' for trading, such as decentralized exchanges (DEX) that facilitate digital asset trading. According to the IRS, these platforms serve as intermediaries, and classifying them as brokers will help ensure tax compliance.
Under the new regulations, platforms offering digital asset trading or sales (even through smart contracts) may be considered brokers if they exert sufficient control over the transactions. This definition aligns with the IRS's longstanding practice regarding brokers, which the IRS claims has been in place for over 40 years.
The IRS clarified that the focus of these regulations is on information and tax reporting front-end platforms, stating: 'The only DeFi participants considered brokers are front-end service providers for trading.'
The rules do not cover all DeFi applications or their varying degrees of decentralization, narrowing their scope to platforms that actively facilitate client trading.
The regulations will apply to digital asset trading starting in 2027, with brokers required to start collecting and reporting data from 2026. The IRS estimates that between 650 and 875 DeFi brokers will be affected, potentially impacting up to 26,000 taxpayers.
The IRS argues that these measures are consistent with existing broker regulatory requirements and do not intend to discriminate against the DeFi industry.
The IRS stated: 'Under Section 6045, the information reporting by DeFi brokers will enhance taxpayer compliance.'
However, classifying the DeFi front end as brokers may pose challenges for platforms operating in a decentralized manner.
Essentially, the IRS still considers crypto assets as property rather than currency for income tax purposes, consistent with regulatory guidance issued seven years ago. This means authorities will continue to tax cryptocurrency profits and losses, similar to stocks, calculated at capital gains rates.
The IRS also discussed how to track fair market value, capital gains, and losses in the context of virtual currencies. When cryptocurrency exchanges facilitate transactions, the taxable value of the transaction is the amount recorded in USD by the platform. Additionally, the taxpayer's buy/sell price will determine whether a gain or loss occurs and its duration.