IRS Faces Legal Pushback Over New DeFi Compliance Rules

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As a seasoned researcher with a decade of experience in the dynamic world of blockchain and cryptocurrencies, I find the ongoing legal action against the US Internal Revenue Service (IRS) particularly intriguing. The recent move by the Blockchain Association, DeFi Education Fund, and Texas Blockchain Council to challenge the IRS’s decision to categorize decentralized finance (DeFi) platforms as brokers is a bold step that reflects the evolving nature of this industry.

Three significant advocacy organizations for digital currencies – the Blockchain Association, DeFi Learning Foundation, and the Texas Cryptocurrency Coalition – are taking the United States Internal Revenue Service (IRS) to court.

The lawsuit challenges the IRS and Treasury Department’s recent decision to categorize decentralized finance (DeFi) platforms as brokers, a ruling that has sparked significant controversy within the crypto sector.

IRS Broker Redefinition Triggers Legal and Legislative Issues

On December 27th, the Internal Revenue Service (IRS) finalized fresh rules aimed at the Decentralized Finance (DeFi) sector, broadening the term “broker” to encompass decentralized exchange platforms and other user interfaces.

Starting from 2027, these new rules require the mentioned entities to disclose all cryptocurrency and digital asset transactions, with information about the taxpayers involved. The purpose of this regulation is to boost transparency in digital asset transactions.

Yet, crypto supporters challenge the IRS’s broad interpretation of giving broker status to DeFi platforms, claiming it exceeds the legal authority granted to them. They further assert that this move violates the Administrative Procedure Act (APA), and they consider it an unconstitutional act.

Additionally, they assert that the regulation places excessive obligations for compliance on software developers, especially those building trading platforms. In their view, this could hinder innovation substantially and potentially put a great deal of stress on American start-ups.

Marisa Coppel, Head of Legal at the Blockchain Association, stated that the IRS and Treasury have overstepped their legal boundaries by broadening the term “broker” to encompass DeFi trading platform providers, despite these entities not executing transactions. This move not only invades the privacy of individuals using decentralized technology, but it could also drive this rapidly growing technology overseas.

Additionally, the regulatory adjustment has sparked a significant response within the wider cryptocurrency community, as some key figures within the industry have advocated for legislative action.

Bill Hughes, an attorney at Consensys, expressed concern that the release of the rule during the holiday season was a tactic aimed at reducing opposition from the industry. Likewise, Miles Jennings, General Counsel at a16z Crypto, characterized the rule as an excessive reach, designed to restrict DeFi activities.

Additionally, Alexander Grieve, Vice President of Government Affairs at Paradigm, has strongly recommended that the incoming Congress reconsider and potentially veto these newly proposed regulations.

U.S. legislators such as French Hill and Patrick McHenry have previously voiced their disapproval of this action, hinting at potential opposition to it.

According to Hill’s statement, the Treasury department under the Biden-Harris administration disregarded both Democratic and Republican lawmakers in Congress by officially implementing a contentious rule regarding broker tax reporting today. This rule, as Hill sees it, is an excessive move by the Treasury that aims to unfairly target Decentralized Finance (DeFi), and it should not have been approved during the final days of the Biden-Harris Administration.

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2024-12-28 14:32