Lawsuit Against IRS Rule on DeFi Reporting

The Blockchain Association, the DeFi Education Fund, and the Texas Blockchain Council have filed a lawsuit challenging a recently finalized IRS rule that requires some decentralized finance (DeFi) brokers to store and report users' personal information and trading history to the agency starting in 2027.

Opposition to the Rule

The controversial rule's finalization was met with widespread criticism from crypto industry experts, who argue that it creates an undue burden on certain DeFi protocols. They claim these protocols would have to collect, protect, and report sensitive personal information, even when it is unclear which entity would perform these functions.

Marisa Coppel, the top lawyer at the Blockchain Association, stated, "Not only is this an infringement on the privacy rights of individuals using decentralized technology, but it would push this entire, burgeoning technology offshore."

Arguments in the Lawsuit

The lawsuit argues that the nature of DeFi should exempt protocols from the reporting requirement, asserting that the regulation represents a statutory overreach that could "effectively end the DeFi industry." The lawsuit emphasizes that, unlike traditional finance, DeFi does not use intermediaries like brokers. Instead, users maintain custody over their own digital assets and transact directly with one another using software, with no broker-like entity involved in decentralized transactions.

IRS Justification

The IRS' final rule responds to comments from industry figures, stating that the reporting requirement would benefit tax compliance by closing the information gap regarding digital assets. This rule is part of changes to broker-reporting regulations introduced by the Infrastructure Investment and Jobs Act passed in 2021 and was first proposed in August 2023.

Potential Impact

Lee Bratcher, president of the Texas Blockchain Council, noted that this regulatory overreach risks driving critical development overseas, threatening U.S. competitiveness in the digital economy. The IRS estimates that the rule could affect approximately 650 to 875 DeFi brokers, with a midpoint of about 765 brokers, as well as roughly 2 million U.S. taxpayers.