New IRS Regulations On DeFi Brokers Face Industry Backlash

According to Cointelegraph, the United States Internal Revenue Service (IRS) has introduced new regulations classifying several decentralized finance (DeFi) protocols as brokers, prompting significant backlash from the crypto industry. Announced on December 27, these regulations require front-end protocols facilitating digital asset transactions to adhere to Know Your Customer (KYC) disclosures. The IRS estimates that up to 875 DeFi brokers will be impacted by these changes. The crypto community has reacted strongly on social media, with numerous legal experts arguing that the IRS may be overreaching its authority and potentially infringing on constitutional rights. Jake Chervinsky, chief legal officer at Variant, described the rule as "the dying gasp of the anti-crypto army on its way out of power," urging for it to be overturned by the courts or the incoming administration. Alexander Grieve, vice-president of government affairs at Paradigm, expressed hope that the new pro-crypto Congress could reverse these regulations through the Congressional Review Act (CRA) process. The CRA allows Congress to review and potentially disapprove regulations issued by agencies such as the IRS. The definition of a DeFi broker under the new rules includes platforms performing intermediary functions in facilitating transactions, even if the group does not operate through a legal entity. Miles Jennings, general counsel of a16z Crypto, criticized the rule as "a fantastical expansion" of the term "effectuate transactions," suggesting it could enable the IRS to ban DeFi. Miles Fuller, director of government solutions at TaxBit, noted that the definition encompasses any provider that knows or could know if a transaction results in reportable gross proceeds from the sale of digital assets. However, validation services and wallet software providers are specifically excluded from this definition. The Blockchain Association, an advocacy group, labeled the rule as "a final attempt" to drive the US crypto industry offshore. Kristin Smith, the group's CEO, stated that the industry is prepared to take aggressive action to oppose the rule and looks forward to collaborating with the new pro-crypto Congress and Administration to reverse this and other anti-innovation regulations. The IRS anticipates that the new regulations will affect up to 2.6 million taxpayers.