IRS DeFi Brokerage Rule Ignites Industry Backlash and Legal Challenge

New IRS Reporting Rule Impacts Decentralized Finance (DeFi) Platforms

As reported by Cointelegraph, the Internal Revenue Service (IRS) has recently introduced a controversial reporting rule that classifies decentralized finance (DeFi) front-ends as brokerages. This announcement has raised significant concerns among stakeholders within the cryptocurrency sector.

Potential Paths for DeFi Platforms

Alex Thorn, head of research at Galaxy Digital, has identified three potential courses of action that DeFi platforms may take in response to this new IRS regulation:

• Compliance: DeFi services might choose to comply with the IRS's reporting requirements and accept their designation as brokerages.
• Blocking Access: They might consider blocking users from the United States or stopping upgrades and revenue generation for their smart contracts.
• Non-Compliance: DeFi applications without a front-end website, non-upgradable contracts, and those not receiving fees from digital asset transactions could potentially avoid being classified as brokers.

Thorn elaborated that highly decentralized applications might face challenges in complying with broker reporting requirements due to their inherent structure.

Opposition to the Rule

The IRS's final reporting rule, slated to take effect in 2027, has drawn significant criticism from various crypto industry advocacy groups and executives. Litigation against the IRS has already commenced, with a joint lawsuit filed on the same day the rule was announced, rallying support from the Texas Blockchain Council, the Blockchain Association, and the DeFi Education Fund. This lawsuit contends that the rule represents unlawful and unconstitutional overreach by the Department of the Treasury and the IRS.

Industry Leaders Speak Out

Industry leaders have described the IRS's new regulation as an overreach. Bill Hughes, an attorney at ConsenSys, pointed out the strategic timing of the rule's release, suggesting that the IRS aimed to minimize immediate backlash by issuing it during a holiday period.

Conclusion

The introduction of the new IRS reporting rule signifies a pivotal moment for the cryptocurrency industry, particularly for decentralized finance platforms. As the landscape evolves, the responses from DeFi services will be crucial in shaping the future of cryptocurrency regulation.

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