Emily Walker
The US Internal Revenue Service (IRS) has made a notable change in the cryptocurrency sector by establishing new rules that will mandate decentralized finance (DeFi) brokers to report the gross proceeds from their digital asset transactions.
DeFi Platforms Designated as Brokers
According to the latest regulations, slated to take effect in 2027, DeFi platforms that function as front-end service providers will be considered brokers. This classification imposes rigorous reporting obligations akin to those of traditional financial entities.
These platforms will be required to issue Form 1099 to their users, which will include specific transaction details such as names and addresses.
The IRS emphasizes that these service providers facilitate digital transactions and must report the gross proceeds from cryptocurrency sales. This initiative is designed to boost transparency in the cryptocurrency arena and ensure the effective collection of taxes on undisclosed transactions.
Specifically targeting DeFi trading interfaces that let users interact with decentralized exchanges, the IRS aims to align digital asset trading with established financial norms by treating these platforms as brokers.
The IRS remarked, “Providing a software suite that allows a customer to engage with a distributed ledger network and conduct transactions using DeFi trading applications exemplifies the provision of a service that facilitates transfers.”
Uncertainty in Crypto Taxation Ahead
While the regulations intend to close existing tax loopholes identified in the 2021 federal infrastructure law, they have sparked unease among those involved in the DeFi sector.
Jake Chervinsky, a prominent attorney in the cryptocurrency field, has publicly voiced strong opposition to the new regulations, describing them as an unlawful intrusion. He argued that this rule represents the waning efforts of those opposing cryptocurrency and must be annulled through legal challenges or new political leadership.
Chervinsky also insisted that the IRS oversteps its legal boundaries and contravenes constitutional principles by interpreting “broker” to include DeFi platforms, which was not Congress’s intention.
In response to concerns from various stakeholders, the IRS has stated that brokers making a “good-faith effort” to comply with the 2027 reporting requirements will not face penalties for any unreported digital asset sales during that year. This relief will also apply to some transactions in 2028, allowing the industry time to adapt to these new rules.
With an estimated 650 to 875 DeFi brokers potentially impacted, these regulations could significantly alter how decentralized exchanges operate.
The IRS has clarified that these regulations do not pertain to internet service providers or hardware manufacturers; however, labeling DeFi front-ends as brokers indicates a move toward more stringent regulatory scrutiny.
Image sourced from DALL-E, chart from TradinView.com