IRS Classifies DeFi Protocols as Brokers, Igniting Industry Backlash
The final regulations issued by the United States Internal Revenue Service (IRS) on December 27, 2023, have set off a firestorm of controversy within the cryptocurrency industry. These regulations classify certain decentralized finance (DeFi) protocols as brokers, mandating Know Your Customer (KYC) disclosures for digital asset transactions. This move has provoked widespread discontent, with many in the industry urging the incoming Congress to overturn these new rules.
Industry Outcry Over New Broker Regulations
The IRS regulations stipulate that front-end protocols facilitating digital asset transactions are to be treated as brokers. As a result, these entities must adhere to KYC requirements for transaction disclosures. The IRS estimates that these regulations will impact up to 875 DeFi brokers, highlighting the extensive reach of this new classification.
The response on social media has been overwhelmingly critical, with legal experts suggesting that the IRS may be overreaching its authority and potentially violating constitutional rights. Jake Chervinsky, the chief legal officer at venture capital firm Variant, described the regulation as an “unlawful rule” and a “dying gasp of the anti-crypto army on its way out of power.” He emphasized the need for the courts or the incoming administration to strike it down.
Legislative and Legal Challenges Ahead
Alexander Grieve, vice-president of government affairs at venture firm Paradigm, expressed optimism that the new pro-crypto Congress could roll back these regulations using the Congressional Review Act (CRA). The CRA provides Congress the ability to review and potentially disapprove of regulations issued by federal agencies like the IRS.
The DeFi broker definition under these regulations encompasses platforms that perform intermediary functions in facilitating transactions, including groups of persons facilitating transactions, regardless of whether the group operates through a legal entity.
Miles Jennings, general counsel of a16z Crypto, criticized the regulation as a “fantastical expansion” of the term “effectuate transactions,” arguing that it could serve as a means for the IRS to ban DeFi.
Potential Impact on the Crypto Industry
According to Miles Fuller, director of government solutions at TaxBit, the definition covers any provider that knows or is in a position to know about reportable gross proceeds from the sale of digital assets. However, two specific groups are excluded: validation services and wallet software providers.
Advocacy group Blockchain Association described the rule as a “final attempt” to drive the U.S. crypto industry offshore. Kristin Smith, the group’s CEO, stated that the industry is prepared to take aggressive action to contest the rule and looks forward to collaborating with the new pro-crypto Congress and Administration to roll back this and other perceived anti-innovation measures.
The IRS anticipates that these new regulations will affect as many as 2.6 million taxpayers, raising significant concerns about the broader implications for the burgeoning DeFi sector.
Related: IRS doubles down on crypto staking taxes — Report
For further details, visit the source: Cointelegraph
Source: Alexander Grieve
Source: Miles Jennings
