- The US Treasury has classified DeFi platforms as traditional brokers, imposing new obligations on them to store and report user transaction data similar to market brokers under its new regulations.
- Intermediaries in digital assets must comply with new IRS regulations by January 1, 2025, during which time users will receive a Form 1099 and their profits will be subject to taxation.
The US Department of the Treasury and the Internal Revenue Service (IRS) have unveiled a tax filing framework that will affect the fast-growing decentralized finance (DeFi) sector. This new regulatory framework introduces several key provisions designed to ensure compliance and collect tax revenue from the rapidly expanding industry, including a requirement for DeFi protocols to implement Know-Your-Customer (KYC) procedures.
Improved reporting requirements
According to the frame published on December 27, the interface layer of DeFi platforms, which represent the primary interaction of users through websites and applications, were classified by the IRS as brokers due to their direct engagement with users. Consequently, decentralized exchanges (DEX) like Uniswap and wallet extensions must now comply with traditional broker regulations.
This classification means that while the application and settlement layers remain exempt from these requirements, front-end platforms must ensure compliance, in particular by implementing a KYC protocol to verify user identity. Ideally, DeFi protocols, under the current operating model, are non-custodial. In addition to transaction names and details, market experts believe the new reporting standard could require protocols to include addresses and other sensitive details.
Once the new compliance measures are in place, the IRS will require DeFi brokers to issue a Form 1099 to their users for tax reporting purposes. Digital asset brokers must comply with the new regulations starting January 1, 2025, while DeFi brokers have until January 1, 2027 to comply, admitting that they currently lack sufficient systems to manage user data. In addition, real estate professionals using digital assets for transactions or closings after January 1, 2026 will face new reporting obligations, highlighting the increasing integration of digital assets into traditional industries like real estate.
According to the regulations, DeFi brokers must report all digital assets, including non-fungible tokens (NFTs) and stablecoins. Some types of transactions are exempt from the obligation of immediate reporting. This includes activities such as shares, lending transactions, wrapping and unwinding and liquidity provisions.
Aviva Aron-Dine, Acting Assistant Secretary for Tax Policy, said the revised framework aims to create a fairer tax environment and establish uniform reporting requirements for all participants.
However, the reaction to these new regulations was mixed. Industry leaders, who previously resisted the agency’s tax proposal last year, are expected to voice similar opposition this time around. Among them, Jake Chervinskychief legal officer at Variant Fund, criticized the regulation as illegal, calling it the “dying breath” of an anti-crypto faction losing its grip on power. He firmly argued that the regulation must be overturned, either through judicial intervention or by a new administration.
Bill Hughessenior counsel at Consensys, believes the outgoing administration will face resistance in implementing the new rules, especially since Congress has the power to override them, particularly the repeal of Staff Accounting Bulletin (SAB) 121. Meanwhile, Trump supporters are optimistic in Scott Bessent’s view becomes Treasury Secretary, as he is pro-crypto and may be more responsive to industry advocates than the former secretary, Janet Yellen.
