New IRS Rules for DeFi Brokers

The U.S. Internal Revenue Service has finalized rules requiring certain brokers in decentralized finance (DeFi) to report on gross proceeds in digital asset sales.

Under the updated regulation, “DeFi brokers” will act like traditional brokers handling securities. They are required to collect information about their users’ trades and send them a Form 1099. This form is used to report payments not typically from an employer, such as other income.

> “These regulations will help ensure that all taxpayers play by the same set of rules and have access to the information they need to file their taxes accurately,” said Aviva Aron-Dine, acting assistant secretary for tax policy. “Aligning tax reporting requirements for digital assets with reporting for other assets will make filing easier and cheaper for compliant taxpayers while also helping close the tax gap.”

Some decentralized finance industry participants will need to file tax returns revealing the name and address of each customer. The final rule applies to front-end service providers interacting with customers, implying that entities running the primary website for accessing a decentralized protocol will be involved.

Uniswap Labs, for instance, which operates a popular decentralized exchange portal, may be affected by this expanded definition of a broker. However, the practical implications of the rule remain unclear.

Critics argue that the new tax reporting requirements are challenging for the crypto industry because DeFi operates differently from traditional assets and often lacks centralized service providers that can collect and share user data. This complexity raises questions about privacy as well.

The rule is expected to go into effect on or after January 1, 2027. This initiative to enhance tax-enforcement for digital asset service providers was initially suggested in the Infrastructure Investment and Jobs Act passed in 2021.

The IRS first proposed these regulations in August 2023, later refining them but not finalizing a definition of “digital asset middleman” for DeFi due to industry backlash. Some commentators suggest that DeFi should not be subjected to the same rules as traditional brokers due to the unique challenges they face.

However, the IRS contends that DeFi participants must comply with the same rules as other financial service businesses. According to the IRS and Treasury:

> “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.”

Bill Hughes, Consensys senior counsel, predicts potential legal and congressional challenges against the new rule, stating a lawsuit could emerge claiming the rule exceeds Treasury’s authority. The Blockchain Association, a Washington D.C.-based industry lobby, has announced plans for aggressive opposition to this rule change, which might be overturned under the Congressional Review Act.