The IRS "DeFi Broker" final rule faces strong opposition from the crypto industry. What is the likelihood of the Trump administration withdrawing it?

Author: Weilin, PANews

On December 27 local time, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) released the final rule document for "DeFi brokers," which has sparked widespread criticism from the crypto industry. The rule requires DeFi brokers to report digital asset sales revenue and collect user KYC information starting in 2025.

The regulation will officially take effect 60 days after its announcement. However, the document also notes that there will be a transition period from 2025 to 2026, during which some degree of leniency may be granted, although the specific scope and standards for this leniency remain unclear. After the grace period, the new regulations will apply to digital asset sales starting in 2027, and brokers will need to begin collecting and reporting the necessary data for digital asset transactions from 2026.

Crypto industry insiders point out that in practice, it is the users who facilitate transactions, and the IRS has mistakenly defined DeFi service providers as brokers, forcing them to collect user information, which will lead to significant privacy violations and exceeds the IRS's statutory authority. Some analysts believe that Trump may revoke the reporting rules, but the overlap of the effective date 60 days later with the new administration's inauguration (January 20) may mean that the Republicans will be busy with other priorities. The new regulations may force DeFi service providers to exclude U.S. users from their services.

"DeFi Brokers" Final Rule Requires Reporting of Total Revenue and User Information

The document from the U.S. Department of the Treasury and the IRS is titled "Reporting Total Revenue of Brokers Facilitating Digital Asset Sales," with the previous version published in August 2023, which opened a public comment process that received 44,000 feedback submissions. This time, the final rule, which spans 115 pages, requires DeFi brokers to provide clients with Form 1099 and collect user transaction information, including names and addresses. Additionally, it requires reporting the total revenue obtained from clients disposing of digital assets in certain sales or exchange transactions.

According to the document, if a DeFi platform participates in facilitating the exchange or sale of digital assets (even through smart contracts) and exerts sufficient control or influence over the transaction process, it may meet the definition of a broker. The U.S. Department of the Treasury states that the final rule applies to "front-end service providers" that "interact directly with customers," which means the entities operating the primary websites used to access decentralized protocols, rather than the protocols themselves.

In the document, the IRS has categorized the DeFi ecosystem into three distinct layers:

• Interface Layer: Includes user-facing components such as screens, buttons, forms, and other visual elements in websites, mobile apps, and browser extensions. This layer facilitates interaction between users and DeFi participants.

• Application Layer: The layer that executes user transaction instructions and is part of the transaction validation process.

• Settlement Layer: Responsible for recording financial transactions on a distributed ledger, including transactions conducted through DeFi protocols.

The IRS believes that only the interface layer, particularly "front-end trading services," will be considered "brokers." The underlying principle is that front-end trading services have the closest relationship with customers, allowing them to obtain customer KYC (Know Your Customer) information and report relevant data to the IRS. The IRS states that front-end trading services include websites that allow users to exchange digital assets through their interfaces, non-custodial wallets, and browser extensions. (Non-custodial wallets used solely for managing private keys do not fall under the broker category.)

Much of the document outlines the comments received and definitions of many foundational concepts, as well as the views of the Treasury and IRS, which believe that "DeFi brokers" should follow the same rules as brokers handling traditional securities. The document also states that "the Treasury and IRS disagree that the final rule reflects bias against the DeFi industry and do not agree that these regulations will hinder compliant customers from adopting this technology."

According to the IRS's estimates, between 650 and 875 DeFi brokers will be affected by these final regulations.

"Under Section 6045, the information reporting by DeFi brokers will enhance taxpayer compliance, as taxpayers participating in digital asset transactions without a custodial broker will have their earned income become more transparent to the IRS and themselves," the IRS estimates that the new regulations will affect up to 2.6 million taxpayers.

"These regulations will help ensure that all taxpayers follow the same rules and can access the information they need to accurately report their taxes," said Aviva Aron-Dine, Deputy Assistant Secretary for Tax Policy, in an official statement. "Aligning the tax reporting requirements for digital assets with those for other assets will make it easier and cheaper for compliant taxpayers to file their taxes while also helping to narrow the tax gap."

Strong Opposition from the Crypto Industry, Large-scale Privacy Violations Expected

One example likely to be directly affected by this final rule is Uniswap Labs, which operates the decentralized exchange uniswap.org. Uniswap's Chief Legal Officer Katherine Minarik stated in a post on X on December 27: "There are many ways to challenge this (final rule), and it absolutely should be challenged."

Meanwhile, crypto industry organizations such as the Blockchain Association, DeFi Education Fund, and Texas Blockchain Council have already filed lawsuits against the U.S. Department of the Treasury and the IRS. On December 28, the Blockchain Association tweeted that the IRS and Treasury have exceeded their statutory authority by expanding the definition of "brokers" to include providers at the front end of DeFi transactions, even though they do not execute trades. This not only infringes on the privacy rights of individuals using decentralized technology but also pushes the entire thriving technology overseas.

The organization's legal head, Marisa Tashman Coppel, stated that the final rule violates the Administrative Procedure Act (APA) and is unconstitutional. Even if these service providers do not execute trades—users do—the IRS has mistakenly defined them as brokers. These software providers will need to collect and report transaction data and personal information. These providers are not traditional intermediaries and do not have "customers" like brokers do.

She believes that the forced collection of such information raises significant privacy issues and exceeds the IRS's statutory authority. Moreover, the IRS has not adequately addressed the risks posed by this rule to users, entrepreneurs, and other participants in the DeFi ecosystem. DeFi enables users to participate in a fairer financial system. However, the government is now forcibly inserting intermediary roles that do not exist, leading to more risks and unequal opportunities. We need to protect DeFi technology, not destroy it. This rule violates the APA, the Constitution, and the IRS's statutory authority. By exposing wallet addresses, it also infringes on the privacy rights of millions of Americans who wish to transact outside the traditional financial system. We hope the court will recognize this and overturn the rule.

Michele Korve, head of regulatory affairs at the well-known crypto venture fund a16z Crypto, also posted on X, stating: "We at a16z Crypto believe that DeFi will make financial services and the digital economy more convenient, efficient, interoperable, reliable, and consumer-centric. However, yesterday the U.S. Treasury released new broker reporting rules that pose a direct threat to this promise and undermine the future of DeFi innovation in the U.S. … DeFi builders should have confidence that industry lawyers are working to protect this technology. We will continue to fight on all fronts— in the courts, in Congress, and with the new administration's help."

Trump Administration May Revoke Reporting Rules, But Time is Tight

According to analysts, the final version of the DeFi reporting rules may be challenged under the Congressional Review Act (CRA). This act allows Congress to repeal final rules issued by federal agencies within a specific timeframe. The first Trump administration previously repealed 16 regulations from the Obama era.

The key question is whether Congress believes these regulations are consistent with the legislation passed by Congress, and the upcoming government transition will overlap with the 60-day review period. However, the Republicans have other priorities in 2025, such as developing a new tax plan to extend the tax law passed in 2017. Jonathan Cutler, a senior manager of global information reporting at Deloitte Washington National Tax, stated that the repeal of cryptocurrency rules may be overlooked. "Congress may not have time to deal with it because they have too many other things to do."

Some tax professionals focused on cryptocurrency are skeptical about the IRS's ability to enforce these reporting rules. For example, the agency may not even be aware of the existence of certain DeFi platforms, making audits difficult.

On December 29, Alex Thorn, head of research at Galaxy Digital, stated that if the IRS's designation of DeFi front ends as "brokers" is not revoked, the DeFi industry will face three options: comply with the IRS's reporting requirements and accept the broker designation, attempt to block U.S. users, or abandon smart contract upgrades and revenue generation.

Currently, the DeFi broker rules may still change with the arrival of a pro-crypto Trump administration, and PANews will closely monitor the developments.