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IRS makes final decision for DeFi and user taxation
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Will this new law make it difficult for users to enter the DeFi market in 2027?
On July 9, 2024, the U.S. Treasury Department issued final regulations requiring custodial brokers to report trading information on assets they manage to their clients. At the same time, they also warn that the same rules will apply to non-custodial brokers in the future.
Then on December 27, 2024, the Treasury Department officially announced the regulations applicable to DeFi, focusing on trading front-end services that help individual investors interact with DeFi protocols.
According to the plan, this regulation will come into force from January 1, 2025. From 2027, it will require brokers to disclose information about the total amount of proceeds from the sale of cryptocurrencies and other digital assets, including information related to taxpayers who participated in the transaction.
Accordingly, the IRS analyzed DeFi activity into three levels:
- Interface layer: A place where users interact directly, such as trading applications or cryptocurrency wallets.
- Application layer: This is where transaction logic is handled, such as smart contracts or DeFi protocols.
- Settlement layer: This is where the actual transaction is executed and recorded on the blockchain.
Although there are opposing opinions that the use of the traditional stock trading model as a reference is inappropriate because of the marked differences between DeFi trading and securities trading, the IRS still insists the use of this model is helpful in understanding and defining the fundamental steps of trading.
According to the IRS, these regulations merely treat DeFi like any other industry, an assertion that has been applied to brokers for more than 40 years.
“The Treasury Department and the IRS do not agree that these final regulations present a bias against the DeFi industry or that these regulations will prevent adoption of this technology by law-abiding customers.”
The new rules will apply to digital asset transactions starting in 2027. Brokers will have to start collecting and reporting data needed for digital asset transactions from 2026. According to the IRS, between 650 and 875 DeFi projects are expected to be affected by these regulations.
“The reporting of information by DeFi brokers under clause 6045 will result in higher levels of tax compliance, as income earned from taxpayers' digital asset transactions that do not pass through a custody broker will become more transparent to both the IRS and taxpayers,” it said.
The IRS applies reporting obligations only to parties capable of actually collecting and providing useful trading information to them, such as front-end trading platforms. Other parties who cannot or do not have access to important information will be exempted from this obligation.
Some users on X argue that the new law will make it more complicated to participate in the crypto market. They are concerned that trading processes will be bound by more regulations, while having to pay taxes will add financial and procedural burdens. This can make entering the market no longer as easy as it used to be, especially for individual users.
The altcoin market also reacted less positively to this news as most projects were in a slight decline.
