IRS Enforces New Reporting Rules on DeFi: Legal Battles and Industry Backlash Ensue
by aria-crypto.com
December 28, 2024 at 19:03
IRS Enforces New Reporting Rules on DeFi: Legal Battles and Industry Backlash Ensue
The U.S. Internal Revenue Service (IRS) is facing substantial legal pushback from industry leaders like the Blockchain Association, the DeFi Education Fund, and the Texas Blockchain Council due to a new regulation that categorizes decentralized finance (DeFi) platforms as brokers, thus requiring them to uphold stringent reporting standards by 2027. This classification is part of the IRS’s broader intent to integrate DeFi into the existing tax framework, a move derived from the Infrastructure Investment and Jobs Act amendments to broker-reporting rules in 2021. The DeFi community and key legal figures argue that this rule, by requiring DeFi platforms to perform Know Your Customer (KYC) checks and report extensive user data, unfairly stretches the traditional definition of a broker and infringes on user privacy. Critics argue that instead of brokers, DeFi protocols facilitate peer-to-peer interactions without centralized intermediation, raising questions about the feasibility and legality of imposing broker-like obligations on them. IRS leaders assert that these measures are crucial for improving tax compliance and closing information gaps concerning digital asset transactions. However, the controversial nature of this decision has spurred fears that it could drive innovative DeFi operations away from the U.S, threatening the competitiveness of the nation’s digital economy in the global market. If unamended, this ruling could affect an estimated 765 DeFi entities and numerous users, heightening legal and operational challenges for a growing sector at the heart of cryptocurrency innovation.
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