The US Internal Revenue Service’s innovations threaten the field of decentralised finance in crypto. How exactly?
The US Internal Revenue Service (IRS) has published new rules requiring brokers to provide information on digital asset transactions. The update expands reporting requirements, affecting even DeFi platforms in the crypto world. It will go into effect in 2027, requiring brokers to disclose revenue from sales of cryptocurrencies and other digital assets, including taxpayer information on transactions. Of course, the innovations did not please representatives of the crypto sphere, which is based on the ideals of decentralisation.
The new norms caused a wave of criticism among cryptocurrency fans on social networks. Many legal experts believe that the IRS is thus able to exceed its own authority and violate the constitutional rights of Americans. Accordingly, coin users expect the new Congress after the inauguration of President-elect Donald Trump to promote the adoption of more lenient regulations for the industry.
How cryptocurrencies are regulated
According to Cointelegraph’s sources, the new rules do not directly apply to all DeFi applications and their level of decentralisation, but tax reporting based on the actual income of their customers remains important.
That is, the requirements apply to platforms that facilitate digital asset transactions for customers – such as decentralised exchanges.
The definition in the published IRS document includes platforms that mediate transactions. They include groups of individuals involved in these processes, “regardless of whether the group acts through a legal entity.”
Volume of blocked funds in decentralised finance
Under the new rules, if a DeFi platform is involved in the exchange or sale of digital assets – and even through smart contracts – and has sufficient control or influence over the transaction process, it can be classified as a broker.
And this would create a huge number of problems for developers of decentralised platforms like exchanges. Here’s a rejoinder to that.
These final rules will allow service providers to provide their customers with the same useful gross revenue information as custodial brokers.
U.S. Internal Revenue Service building
According to the U.S. Internal Revenue Service, the new regulations “simply equate” DeFi with other traditional areas. Still, similar rules have been applied to brokers for more than 40 years.
The Treasury Department and the IRS do not agree that these final rules reflect a bias against the decentralised finance industry or that they will discourage bona fide customers from using the technology.
The new rules will begin to apply to digital asset sales in 2027. Brokers must begin collecting and reporting required data on digital asset transactions beginning in 2026. The IRS estimates that between 650 and 875 brokers and 2.6 million taxpayers will be affected by these rules.
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The innovations did not please many prominent representatives of the crypto community. Here’s what Jake Czerwinski, general counsel at Variant, said on the matter.
The IRS finalised the second half of its rules for brokers, requiring most DeFi platforms to conduct a user identity verification process starting in 2027. This illegal rule is the death sigh of an anti-cryptocurrency army that is running out of power. It should be overturned either by a court of law or a future presidential administration.
Paradigm Vice President Alexander Grieve shared a similar opinion.
A new pro-cryptocurrency Congress can and should repeal these measures through the CRA process next year.
Most popular DeFi protocols in the cryptocurrency industry
The CRA or Congressional Review Act allows Congress to review and, in theory, reject regulations issued by multiple government agencies. The latter also includes the US tax authorities.
Meanwhile, organisations DeFi Education Fund and Texas Blockchain Council have filed a lawsuit challenging the IRS’s recent regulations. This was announced by Marisa Koppel, chief legal officer of the Blockchain Association. Her remarks are cited by The Block.
This is not only a violation of the rights of individuals using decentralised technology, but also pushing all of this booming technology offshore.
Blockchain developers
The lawsuit argues that the nature of decentralised finance should exempt protocols from the reporting requirement, and that the rule itself would be an overreach of the law that could “effectively end the DeFi sphere”. The lawsuit includes the following lines.
DeFi, unlike traditional finance, does not rely on intermediaries like brokers. Instead, users store their own digital assets and transact with each other directly using software. There are simply no brokers involved in a decentralised transaction.
Here's to hoping that the new US government under Donald Trump will take action against the initiative within the IRS. Supporting the cryptocurrency industry was one of the pillars of Trump's election campaign. As such, many coin holders expect him to begin taking the first steps towards a loyal set of rules to regulate the industry as soon as he is inaugurated. At the very least, Paul Atkins at the head of the Securities Commission has proven to be an excellent choice for the coin niche.
Look for more interesting stuff in our crypto chat. We look forward to seeing you there as early as today so you won’t be sad.
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