DeFi proponents to fight US IRS tax code

The U.S. Internal Revenue Service said DeFi brokers should comply with long-standing securities rules, disagreeing with industry sentiment arguing for different laws for digital assets.

Updated rules from the IRS published on Dec. 27 would direct some “DeFi brokers” to operate like traditional finance institutions by collecting certain user activity data and reporting on cryptocurrency proceeds.

The finalized rules apply to “front-end” DeFi operators, referring to service providers that directly manage websites used to access web3 platforms like decentralized exchanges for both U.S. and non-U.S. participants.

So-called DeFi brokers would also have to report on all digital assets, including NFTs and stablecoins. Aviva Aron-Dine, acting assistant secretary for tax policy, said the revised framework would level the taxpayer playing field and standardize reporting requirements for all participants.

Crypto industry incumbents have debated against digital assets falling under the purview of existing securities laws, emphasizing that the industry requires different rules. The IRS, in a joint statement with the Treasury Department, completely disagreed with this assertion.

The Treasury Department and the IRS do not agree that DeFi participants should be excluded from the information reporting rules under section 6045 because of a lack of financial services experience or because of a purported lack of comprehensive regulatory oversight. Persons with technology expertise that operate trades or businesses relating to financial services should comply with the same rules as any other person operating financial services businesses.

IRS and Treasury

The IRS released proposed DeFi/crypto tax reporting policies in August 2023, with revised documents to include exchanges in its compliance guideline unveiled shortly after. Crypto commentators opined that DEXes like Uniswap might be forced to share KYC information, such as names and addresses, with authorities.

Industry leaders fought against the agency’s initial tax proposal last year, and Consensys senior Attorney Bill Hughes predicts the same will happen again. “The outgoing administration is not leaving quietly. The fight continues,” Hugh said via X.

A major concern espoused by crypto users argued that most DeFi protocols can’t comply with securities laws, and privacy would be almost nonexistent under the new laws.

Digital asset advocacy groups like The Blockchain Association promised “aggressive action” against the IRS policies, suggesting Congressional lobbying and perhaps litigation might ensue. Without pushback, the latest rules would be enacted by Jan. 1, 2027.