New IRS Rules Targeting DeFi Spark Industry Backlash
The IRS’s decision to classify decentralized finance (DeFi) protocols as brokers has ignited swift opposition from the crypto industry, with calls for the incoming Congress to overturn the new regulations.
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Announced on Dec. 27, the regulations require front-end protocols facilitating digital asset transactions to adhere to broker requirements, including Know Your Customer (KYC) disclosures. The IRS estimates these rules will impact up to 875 DeFi platforms.
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This move has triggered a wave of criticism across social media, with legal experts arguing that the IRS may be overstepping its authority and infringing on constitutional rights.
Industry Leaders Call for Action
“This unlawful rule is the dying gasp of the anti-crypto army on its way out of power. It must be struck down, either by the courts or the incoming administration,” stated Jake Chervinsky, Chief Legal Officer at Variant, a venture capital firm.
Alexander Grieve, Vice President of Government Affairs at Paradigm, echoed similar sentiments, emphasizing that “the new pro-crypto Congress can, and should, roll these back via the CRA process next year,” he said on X (formerly Twitter).
The Congressional Review Act (CRA) provides Congress with the authority to review and potentially overturn federal agency regulations, offering a possible pathway to repeal these new IRS rules. As the debate unfolds, the crypto industry looks to Congress and the courts to address the contentious policy.
The definition of a DeFi broker under the new IRS rules includes platforms performing intermediary roles in transactions, as well as groups of individuals facilitating transactions, “whether or not the group operates through a legal entity.”
Miles Jennings, General Counsel at a16z Crypto, criticized the rule, calling it “a fantastical expansion of the words ‘effectuate transactions’ to enable the IRS to ban DeFi.”
Miles Fuller, Director of Government Solutions at TaxBit, noted that the definition encompasses any provider who knows, or is in a position to know, whether a transaction generates reportable gross proceeds from the sale of digital assets.
Fuller also clarified that the rule explicitly excludes two categories: validation services and wallet software providers.
The Blockchain Association, an advocacy group, described the rule as “a final attempt” to push the U.S. crypto industry offshore. In a statement, the group’s CEO, Kristin Smith, voiced strong opposition to the regulation.
“On behalf of the industry, we’re prepared to take aggressive action to fight back. We also look forward to working with the new pro-crypto Congress and Administration to roll back this and other anti-innovation rules.”
The IRS estimates that the new regulations could impact up to 2.6 million taxpayers.
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