Internal Revenue Service Imposes New DeFi Tax Rules

Key Points:

• The Internal Revenue Service finalized regulations requiring DeFi brokers to report gross proceeds from digital asset transactions on Form 1099, starting January 1, 2027.
• The rules apply to front-end DeFi service providers and cover all digital assets, including NFTs and stablecoins, potentially affecting up to 2.6 million taxpayers.

The Internal Revenue Service in the United States has finalized regulations requiring brokers of decentralized finance (DeFi) to report digital asset transactions.

Read more: Web3 Security Report 2024: DeFi Strengthens as CeFi Struggles 

Internal Revenue Service Finalizes DeFi Broker Tax-Reporting Rules

Brokers must report gross proceeds on Form 1099 and capture information about users, such as names and addresses, starting January 1, 2027.

The rules hit front-end service providers such as those operating portals into decentralized protocols but stop short of the protocols themselves. That puts DeFi brokers on an even footing with traditional securities brokers regarding their tax reporting duties and responsibilities. According to Acting Assistant Secretary for Tax Policy Aviva Aron-Dine, the measures aim to level the playing field and make reporting more uniform for taxpayers.

DeFi brokers will also have to report transactions of all digital assets, including non-fungible tokens and stablecoins. The IRS thinks the rules will affect 650 to 875 brokers and as many as 2.6 million taxpayers. The brokers will start collecting and reporting data in 2026 to be ready for implementation in 2027.

IRS Forcing a Standardized Crypto Tax Framework

Internal Revenue Service explained that the regulations were no different from the existing broker requirements, which do not single out DeFi unfairly. However, its scope is limited to only those platforms that actively and regularly facilitate the transactions. Barely some decentralized applications interact with the users to perform their functions.

Industry advocates argue that digital assets should not be subject to traditional securities regimes because of the need for tailor-made regulations; the IRS and Treasury disagree, thinking digital asset transactions do require such oversight.

Some lawmakers have proposed new crypto tax measures, but the IRS maintains its role as a neutral enforcer of existing statutes. Still, the regulatory developments are overshadowed by the prospect of possible policy changes, with President-elect Donald Trump promising to change the regulations on digital assets after he takes office next month.