IRS and Treasury Finalize DeFi Broker Regulations, Market Experts Decry ‘Overreach’

• The U.S. Department of the Treasury has classified DeFi platforms as traditional brokers, imposing new obligations on them to store and report user transaction data similarly to market brokers under its new regulations.
• Digital asset brokers must comply with new IRS regulations by January 1, 2025, and during this time, users will receive Form 1099, with their profits subject to taxation.

The U.S. Treasury Department and the Internal Revenue Service (IRS) have unveiled a tax reporting framework that will affect the fast-growing decentralized finance (DeFi) sector. This new regulatory framework introduces several key provisions designed to ensure compliance and capture tax revenue from the rapidly expanding industry, including a requirement for DeFi protocols to implement Know-Your-Customer (KYC) procedures.

Enhanced Reporting Requirements

According to the framework published on Dec. 27, the Interface layer of DeFi platforms, which constitutes the primary user interaction through websites and applications, has been classified as brokers by the IRS due to their direct engagement with users. Consequently, decentralized exchanges (DEX) like Uniswap and wallet extensions are now required to comply with traditional broker regulations. 

This classification means that while the Application and Settlement layers remain exempt from these requirements, frontend platforms must ensure compliance, specifically by implementing KYC protocols to verify user identities. Ideally, DeFi protocols, per the current operational model, are noncustodial. In addition to the name and transaction details, market experts believe the new reporting standard might require protocols to include addresses and other sensitive details.

Once the new compliance measures are in place, the IRS will mandate that DeFi brokers issue Form 1099 to their users for tax reporting purposes. Digital asset brokers must comply with new regulations starting January 1, 2025, while DeFi brokers have until January 1, 2027, to meet these requirements, acknowledging their current lack of sufficient systems for managing user data. Additionally, real estate professionals using digital assets for transactions or closings after January 1, 2026, will face new reporting obligations, emphasizing the increasing integration of digital assets in traditional industries like real estate.

Under the regulations, DeFi brokers are required to report on all digital assets, including Non-Fungible Tokens (NFTs) and stablecoins. Some transaction types are exempt from immediate reporting obligations. This includes activities such as staking, lending transactions, wrapping and unwrapping, and liquidity provisions.

Aviva Aron-Dine, the acting assistant secretary for tax policy, stated that the revised framework aims to create a more equitable tax environment and establish uniform reporting requirements for all participants.

However, the response to these new regulations has been mixed. Industry leaders, who previously resisted the tax proposal introduced by the agency last year, are expected to express similar opposition this time around. Among them, Jake Chervinsky, the chief legal officer at Variant Fund, criticized the regulation as illegal, referring to it as the “dying gasp” of the anti-crypto faction as it loses its grip on power. He firmly asserted that the regulation must be struck down, whether through judicial intervention or by the incoming administration.

Bill Hughes, a senior attorney at Consensys, believes the outgoing administration will encounter resistance in implementing new rules, particularly with Congress having the power to reject them, especially the repeal of Staff Accounting Bulletin (SAB) 121. Meanwhile, Trump’s supporters are optimistic about Scott Bessent becoming Treasury Secretary, as he is pro-crypto and may be more responsive to industry advocates than the former secretary, Janet Yellen.