IRS DeFi Broker Rule Faces Pushback, With Industry Leaders Calling for Legal Challenges

The U.S. Internal Revenue Service’s (IRS) recent ruling that requires decentralized finance (DeFi) platforms, such as decentralized exchanges (DEXs), to adhere to the same reporting requirements as traditional brokers has sparked significant backlash from industry executives and legal professionals. Many are raising concerns that the rule may not withstand legal challenges.

Katherine Minarik, the Chief Legal Officer of decentralized exchange Uniswap, voiced strong opposition to the new rule, stating on December 27, “No shortage of ways to challenge this, and it absolutely should be challenged.” Minarik criticized the IRS’s stance, which classifies DeFi platforms as brokers simply because they facilitate part of a transaction. “It sure does seem like the IRS says they’re regulating ‘any service effectuating transactions’ as brokers... then goes on to classify DeFi tech as brokers... because it is involved in just a part of a transaction,” Minarik remarked.

Uniswap’s CEO, Hayden Adams, also expressed hope that the ruling would be rejected under the Congressional Review Act (CRA). The CRA allows Congress to review and disapprove of regulations issued by government agencies. Adams is optimistic that even if the ruling is not overturned by Congress, it may face significant legal challenges that could prevent it from being implemented.

The New IRS Rule: Impact on DeFi Platforms

On December 27, the IRS issued final regulations that extend reporting requirements to include DeFi platforms, which were previously excluded from such obligations. The new rules, set to take effect in 2027, mandate that brokers disclose gross proceeds from the sale of digital assets, including cryptocurrencies, stablecoins, and non-fungible tokens (NFTs), and provide information about the taxpayers involved in these transactions.

The regulations target “front-end service providers” in the DeFi space, which include decentralized exchanges. These platforms will be required to track and report digital asset transactions, a responsibility that has traditionally fallen to centralized exchanges and financial institutions. According to the IRS, the aim is to ensure that digital asset transactions are fully accounted for, helping to prevent tax evasion and improve the reporting of taxable events.

Concerns Over Compliance Costs

Industry experts have warned that complying with these new regulations will present significant challenges for DeFi platforms. Robin Singh, CEO of crypto tax platform Koinly, explained that businesses in the DeFi space would face both operational and technical hurdles to implement the necessary reporting systems. Singh noted that decentralized platforms lack the centralized structures that traditional financial institutions use for compliance, making the new reporting requirements especially burdensome for DeFi operators.

“For businesses operating in the DeFi space, compliance with these regulations will require both operational and technical innovation,” Singh stated. “Decentralized platforms, by their nature, lack the centralized structures needed for traditional reporting, which creates a significant hurdle for many companies.”

Criticism of the Ruling’s Timing and Effectiveness

Bill Hughes, a lawyer at blockchain development firm ConsenSys, also expressed skepticism about the new rule. He called the ruling “all cost, no benefit” from a revenue perspective and suggested that it would not yield significant financial returns for the IRS. Hughes also accused the outgoing administration of intentionally releasing the ruling during the holiday season to minimize public scrutiny. “This rule has been ready to go for a while now. They dump it on the last Friday of 2024 in the middle of a holiday stretch on purpose, obviously,” Hughes said in a post on X.

Similar to Minarik, Hughes believes the rule will likely face review by Congress under the CRA, where it could be disapproved. He emphasized that the ruling would place an undue burden on front-end platforms, which would have to track and report transactions involving users both in the U.S. and globally, covering a wide range of digital assets.

Industry's Response and Next Steps

With the IRS’s new rules set to be implemented in 2027, the crypto industry is gearing up for a fight. Legal professionals and crypto executives are united in their belief that the ruling is overreaching and could stifle innovation within the DeFi sector. They are exploring various avenues, including Congressional action and legal challenges, to block or modify the rule before it takes effect.

As the debate around the IRS’s classification of DeFi platforms as brokers intensifies, the industry will continue to push back against what many see as an unnecessary regulatory burden. Whether or not these challenges will succeed remains to be seen, but for now, the industry’s response underscores the growing tension between regulatory bodies and the rapidly evolving crypto sector.