The US Internal Revenue Service (IRS) has issued regulations requiring brokers to report digital asset transactions, while expanding the definition of broker to include platforms such as decentralized exchanges (DEXs). Several industry lobbying groups filed suit against the IRS and the Treasury Department in response.
On December 27, the IRS – the department of the US Treasury responsible for tax collection and regulation – released new reporting rules classifying certain decentralized finance (DeFi) platforms as brokers and requiring them to disclose information about taxpayers involved in digital asset transactions. Brokers must also report their gross proceeds from the sale of digital assets.
When the rules come into force in 2027, decentralized finance (DeFi) platforms, such as decentralized exchanges (DEX), will be able to be treated as brokers if they facilitate the exchange or sale of digital assets – whether through Smart contracts or other means-and exercise sufficient control or influence on the transaction process.
“DeFi service providers use distributed ledger technologies to provide investment and other financial services, similar to those provided in the securities industry by securities and exchanges that allow customers to trade digital assets using applications,” the IRS document says.
The agency estimates that between 650 and 875 DeFi brokers and up to 2.6 million taxpayers will be affected by the new regulations.
“Information reporting by DeFi brokers under Section 6045 will lead to higher levels of taxpayer compliance, as the income earned by taxpayers who engage in digital asset transactions without an insurance broker will be made more transparent to the IRS and taxpayers,” the IRS said. argued.
The new rules will come into effect in 2027, but brokers – including the DeFi entities that will fall under this category thanks to the amended rules – will have to start collecting and reporting the necessary data for digital asset transactions, starting in 2026.
Digital asset middlemen
Before the changes in the tax rules, the definition of a “broker” included a trader, a barter exchange and a person who regularly acted as a “middleman” in terms of property or services.
Specifically “any person … that, in the normal course of a trade or business during the calendar year, stands ready to make sales of others, a broker is obliged to return information.
Because of the questionable status of digital assets in the United StatesThis definition left room for certain DeFi platforms to join the obligations classified as brokers, namely the disclosure of gross proceeds from asset sales, including information on taxpayers involved in the transactions.
The prospect of this last point has the most consternation in the often anonymous or pseudonymous digital asset industry, with requirements for personal information leading some to claim the information mandated by brokers would be difficult, or in some cases impossible, to gather.
However, the new tax rules have removed any potential ambiguity around who in the digital asset space is a broker through the clause to the definition: “any person who is responsible for regularly providing any service that transfers digital assets on behalf of another person carried out.”
Any person or entity whose activities meet this description will henceforth be classified as a “Digital Asset Middleman”, with the Document and provide further details on how to fall into this new broker category.
According to the IRS, a digital asset intermediary “provides a facilitated service” in which the broker acts as either an agent or counterparty in a digital asset sale. This includes providing a selling party with access to an automatically executing contract or protocol, providing access to digital asset trading platforms, providing an automated market maker system, providing order matching services, providing market making functions, providing services for the discovery of the most competitive buy and sell prices , or provides escrow or escrow-like services to guarantee both parties to an exchange deed in accordance with their obligations.
This may seem to encompass a wide range DeFi platformsbut the latest regulation also stated that “the only DeFi participants treated as brokers (…) are trading front-end service providers.”
In other words, the DeFi platforms that fall under the new definition of brokers – and thus are subject to the associated reporting requirement – are “front-end service providers” that facilitate transactions with digital assets for customers, such as DEX platforms.
The IRS argued that this would “benefit commercial front-end service providers by being able to provide their clients with the same useful information on gross income as insurance brokers.”
Setback and process
Predictably, the new tax rules have not gone down well with everyone in the digital asset industry. On the same day the new rules were published, the DeFi Education Fund, the Blockchain Association, and the Texas Blockchain Council – three blockchain technology advocacy and lobbying organizations – issued a common process against the IRS and the Department of the Treasury.
“During the rule’s comment period, the public warned the IRS and Treasury that moving forward with the rule would hurt the digital asset industry. But the government ignored that feedback, leaving the digital asset sector with a rule that places illegal compliance burdens on software developers who build so-called “retail front-end services.” This midnight rule will stifle innovation and American Entrepreneurs burden – if it remains “, the Blockchain Association argued in a press release announcing the suit.
Filed Dec. 27 in the U.S. District Court for the Northern District of Texas, the suit challenged the IRS and Treasury Department’s final “broker” rules on the grounds that it “exceeds the agencies’ statutory authority, violates the Administrative Procedure Act (“APA”)and is unconstitutional.”
“The IRS and Treasury went beyond their statutory authority to expand the definition of ‘broker’ to include providers of DeFi trading front-ends, even if they do not effect transactions,” said Marisa Coppel, Head of Legal at the Blockchain Association.
“Not only is this a violation of the privacy rights of individuals using decentralized technology, it would push this very nascent technology offshore.”
However, in response to similar feedback and criticism provided during the consultation period for the new rules, the IRS insisted that the regulation “just treats” DeFi like any other industry, claiming that the rules for over 40 years on brokers were applied.
The agency added: “The Treasury Department and the IRS do not agree that these final regulations reflect a bias against the DeFi industry or that these regulations discourage the adoption of this technology by law-abiding customers.”
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