IRS Regulations on DeFi Brokers Spark Fierce Industry Reaction

New IRS Regulations Targeting DeFi Protocols Spark Outcry from Crypto Community

In a significant move that has rattled the crypto industry, the United States Internal Revenue Service (IRS) announced on December 27 new regulations classifying various decentralized finance (DeFi) protocols as brokers. This decision comes with stringent rules requiring these platforms to adhere to Know Your Customer (KYC) disclosures, which the IRS estimates will impact up to 875 DeFi entities.

Reactions from the Crypto Community

The announcement has been met with widespread criticism from within the crypto community, particularly on social media platforms. Legal experts have raised concerns about the IRS potentially overstepping its bounds, potentially infringing on constitutional rights. Jake Chervinsky, chief legal officer at Variant, argued that this move is indicative of "the dying gasp of the anti-crypto army on its way out of power," calling for the courts or the incoming administration to overturn these regulations.

Possibility of Congressional Reversal

Adding to the discourse, Alexander Grieve, vice-president of government affairs at Paradigm, expressed optimism that the newly constituted Congress, which he views as more pro-crypto, may have the ability to repeal these rules through the Congressional Review Act (CRA). The CRA serves as a mechanism for Congress to scrutinize and potentially disapprove regulations enacted by federal agencies like the IRS.

Defining a DeFi Broker Amidst Controversy

Under the newly established rules, a DeFi broker is defined as any platform that engages in intermediary functions for transactions, regardless of whether they operate as a legal entity. Miles Jennings, general counsel of a16z Crypto, criticized this broad interpretation as "a fantastical expansion" of the term "effectuate transactions," suggesting such a definition could give the IRS the power to effectively ban DeFi platforms altogether.

Concerns Over the Scope of Regulation

Miles Fuller, director of government solutions at TaxBit, pointed out that the new definition includes any service provider who might have knowledge of transactions resulting in reportable gross proceeds from the sale of digital assets. Importantly, however, validation services and wallet software providers are specifically excluded from this classification.

Advocacy Group Stance and Future Actions

The Blockchain Association, a leading advocacy group, has described the IRS regulations as "a final attempt" to push the US crypto industry offshore. The association's CEO, Kristin Smith, highlighted that the industry is ready to take decisive measures against this regulatory move and is eager to collaborate with the emerging pro-crypto Congress and Administration to overturn not only these regulations but also other policies viewed as anti-innovation.

Projected Impact on Taxpayers

Looking ahead, the IRS anticipates these new regulations will have ramifications for approximately 2.6 million taxpayers, adding weight to the ongoing debate surrounding the future of digital asset regulation in the United States.

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