In a significant development for the cryptocurrency landscape, the US Internal Revenue Service (IRS) has finalized regulations that will require decentralized finance (DeFi) brokers to report gross proceeds from digital asset transactions. 

Under the new regulations, which will take effect in 2027, DeFi platforms acting as front-end service providers will be classified as brokers. This designation compels them to fulfill stringent reporting requirements similar to those faced by traditional financial intermediaries. 

Notably, these platforms will be required to provide customers with Form 1099, detailing user transaction information, including names and addresses.

The IRS asserts that these front-end service providers facilitate digital asset transactions and therefore must report gross proceeds from cryptocurrency sales. This move reportedly aims to enhance transparency in the crypto market and ensure that taxes owed on unreported transactions are collected effectively.

The regulations specifically target DeFi trading front-ends, which enable users to access decentralized exchanges. By treating these platforms as brokers, the IRS intends to create a framework that aligns digital asset trading with traditional financial practices. 

The IRS stated, “The provision of a suite of software that enables a customer to interact with a distributed ledger network and effectuate transactions using DeFi trading applications is an example of providing a service that effectuates transfers.”

While the regulations are designed to close tax loopholes highlighted in the 2021 federal infrastructure law, they have raised concerns within the DeFi community. 

Jake Chervinsky, a well-known lawyer supporting cryptocurrency, has expressed significant disagreement with the new regulations. He stated, “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.”

Chervinsky further emphasized that the regulations exceed the IRS’s statutory authority and violate constitutional principles, arguing that Congress did not intend for “broker” to encompass DeFi platforms.

The IRS has acknowledged the concerns raised by stakeholders and announced that brokers who make a “good-faith effort” to comply with the reporting requirements in 2027 will be granted relief from penalties for failing to report digital asset sales. 

This provision extends to backup withholding tax liabilities for transactions in 2027 and certain sales in 2028, offering some leeway as the industry adapts to the new regulatory landscape.

With an estimated 650 to 875 DeFi brokers potentially affected by the regulations, this move could reshape the operational landscape for decentralized exchanges. 

While the IRS clarified that the rules do not apply to internet service providers or hardware manufacturers, the classification of DeFi front-ends as brokers indicates a shift toward stricter regulatory oversight.

Featured image from DALL-E, chart from TradinView.com

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