Source: Cult of Money
Key Points
- “DeFi brokers” will now face the same tax reporting requirements as traditional securities brokers, effective January 1, 2027.
- The rule mandates brokers to collect user trading information and provide IRS Form 1099s to customers.
- Critics argue the rule is unworkable for decentralized finance (DeFi) systems and infringes on user privacy.
The U.S. Internal Revenue Service (IRS) has finalized a rule that requires certain decentralized finance (DeFi) brokers to comply with the same tax reporting obligations as traditional securities brokers.
Centralized brokers have to comply with this requirement to collect information and furnish a 1099-DA starting in 2025, but now decentralized brokers will have to do the same starting in 2027.
The regulation is part of an effort to ensure digital asset transactions are subject to similar transparency and tax compliance standards as other financial instruments.
Broker Responsibilities
Under the new rules, brokers facilitating digital asset transactions must report gross proceeds to the IRS and provide customers with Form 1099, a document typically used to report non-salary income.
According to the U.S. Department of the Treasury, these measures aim to simplify tax compliance for taxpayers while narrowing the tax gap.
DeFi Exchange Impact
The finalized rule applies to “front-end service providers,” such as those maintaining websites that interface with decentralized protocols.
For instance, entities like Uniswap Labs, which operates the primary portal for the Uniswap decentralized exchange, could be required to collect and report user information.
However, the decentralized nature of many DeFi platforms, where no centralized entity oversees operations, raises significant questions about implementation.
Critics from the crypto industry argue that applying traditional tax frameworks to DeFi is impractical, citing difficulties in identifying responsible entities and potential privacy concerns. DeFi exchanges, by their very nature, are decentralized and no single entity has access to customer information or even the ability to report the information to the IRS.
Final Thoughts
The rule is expected to face legal and legislative scrutiny. There will likely be lawsuits challenging the rule’s legality under the Administrative Procedure Act.
Congress could also use the Congressional Review Act could be used to overturn the regulation, as lawmakers have done with other controversial measures. Given that the new administration takes office soon, and will control both the House and Senate, this could happen.
If the rules do go into effect, it won't impact transactions until January 1, 2027, giving brokers time to adapt to the changes.
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