DeFi Advocates to Fight US IRS Tax Code

The US Internal Revenue Service said DeFi brokers should comply with long-standing securities rules, at odds with industry sentiment advocating for different laws for digital assets.

Updated IRS rules published on December 27 would direct some “DeFi brokers” to operate like traditional financial institutions by collecting certain user activity data and reporting cryptocurrency revenues.

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

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

crypto industry incumbents have argued 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, strongly disagreed with this statement.

The Treasury Department and the IRS disagree that DeFi participants should be excluded from the reporting rules under section 6045 due to a lack of financial services experience or due to an alleged lack of comprehensive regulatory oversight . technology-savvy people who operate financial services-related operations or businesses must follow the same rules as anyone else who operates financial services businesses.

IRS and Treasury

The IRS published proposed DeFi/cryptocurrency tax reporting policies in August 2023, and revised documents were released shortly afterward to include exchanges in its compliance guidance. crypto commentators opined that DEXs like Uniswap could be forced to share KYC information, such as names and addresses, with authorities.

Industry leaders fought the agency's initial tax proposal last year, and Consensys senior attorney Bill Hughes predicts the same thing will happen again. “The outgoing administration will not go away quietly. The fight continues,” Hugh said via x.

One of the main concerns expressed by cryptocurrency users was that most DeFi protocols cannot comply with securities laws and that privacy would be almost non-existent under the new laws.

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

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