Crypto Industry Pushes Back Against New IRS DeFi Broker Rules

Crypto Industry Pushes Back Against New IRS DeFi Broker Rules

The cryptocurrency industry is voicing strong opposition to new regulations issued by the U.S. Internal Revenue Service (IRS), which classify certain decentralized finance (DeFi) protocols as brokers. The rules, which were finalized on December 27, mandate Know Your Customer (KYC) disclosures for transactions conducted on these platforms, a move that has drawn sharp criticism from industry leaders. Many are calling for Congress to intervene and block the rules.


The newly established regulations treat front-end protocols facilitating digital asset transactions as brokers, thereby subjecting them to reporting requirements that include identifying participants and disclosing transaction details. According to the IRS, these changes could impact up to 875 DeFi brokers and potentially affect as many as 2.6 million taxpayers.


Industry reaction has been swift and overwhelmingly negative. Legal experts and crypto advocates have argued that the IRS may be overstepping its authority by imposing these rules on decentralized platforms, with some suggesting that the regulations infringe upon constitutional rights.


Jake Chervinsky, the Chief Legal Officer at venture capital firm Variant, condemned the rules as an “unlawful” attempt to stifle the crypto industry, calling it “the dying gasp of the anti-crypto army on its way out of power.” He emphasized that the rules should be overturned either through legal challenges or action from the incoming Congress.


Alexander Grieve, Vice President of Government Affairs at Paradigm, echoed this sentiment, urging the new pro-crypto Congress to roll back the regulations using the Congressional Review Act (CRA). The CRA allows Congress to review and potentially disapprove of regulations issued by federal agencies like the IRS. Grieve stated that Congress “can, and should, roll these back via the CRA process next year.”


The new rules expand the definition of "broker" to include any entity or group of individuals involved in facilitating transactions on a DeFi platform, even if they do not operate through a traditional legal entity. Miles Jennings, General Counsel for a16z Crypto, criticized the expanded definition as a “fantastical” overreach, arguing that it could be used by the IRS to impose restrictions on decentralized finance altogether.


Under the new regulations, any service provider that can determine whether a digital asset transaction results in taxable gains would fall under the definition of a broker. However, the rules specifically exclude validation services and wallet software providers from this definition.


Advocacy groups, including the Blockchain Association, have also voiced their opposition. CEO Kristin Smith called the new rules “a final attempt to push the U.S. crypto industry offshore.” The Blockchain Association has pledged to take “aggressive action” against the regulations, and Smith expressed optimism that the new Congress, which is expected to be more crypto-friendly, will work to repeal the rules.


With the IRS set to enforce these regulations in the coming months, the crypto industry is bracing for potential upheaval. Critics argue that the new rules could stifle innovation and drive businesses and developers to more crypto-friendly jurisdictions abroad. As lawmakers prepare to return to session in 2025, the industry is focusing on rallying support for legislative action that could overturn these controversial regulations.

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