Industry Groups Sue IRS Over New KYC 'Broker Rules' for 'DeFi Front-End Services'

• The IRS has published new regulations that mandate "decentralized finance (DeFi) front-end trading services" to report the total income generated from sales of digital assets and withhold services from users that do not comply.
• Under these rules, DeFi entities that have a certain amount of "control" over the trading service are required to gather data on user trades, issue 1099 forms for tax purposes, and provide customer information, including names and addresses.

The IRS defines a "DeFi front-end service" as providing visual elements, such as "screens, buttons, forms, and other visual elements incorporated in websites, mobile device apps, and browser extensions—that users can use to trade digital assets in their unhosted wallets." The rule defines control as having "the ability to amend, update, or otherwise substantively affect the terms under which the services are provided," reports The Rage.

• These services will be classified as "brokers" under new regulations because, according to IRS logic, front-end trading services maintain the closest relationship with customers, enabling them to obtain Know Your Customer (KYC) information and report the necessary data to the IRS.
• The rules are set to take effect in 2027 (although brokers must start collecting and reporting the necessary data in 2026) and stem from the Infrastructure Investment and Jobs Act implemented by the Biden Administration in 2021.

• The U.S. Department of Treasury states that the new regulations align digital asset reporting with traditional assets, aiming to simplify tax filing and address compliance gaps. However, critics argue that the decentralized nature of DeFi poses challenges for these regulations, as many platforms do not have centralized entities to collect user data.

"The IRS and Treasury have gone beyond their statutory authority in expanding the definition of “broker” to include providers of DeFi trading front-ends even though they do not effectuate transactions. Not only is this an infringement on the privacy rights of individuals using decentralized technology, it would push this entire, burgeoning technology offshore," said Marisa Coppel, Head of Legal, Blockchain Association.

• According to Coin Center, the new rules are "unfit and unconstitutional," "beyond the statutory authority," "a violation of free speech rights," and constitute "warrantless search and seizure."
• "This rule has been ready to go for a while now. They dump it the last Friday of 2024 in the middle of a holiday stretch on purpose, obviously. As if we wouldn’t notice or make an absolute ruckus over it," said Consensys lawyer Bill Hughes.

New IRS Broker Rule (PDF)
Treasury Press Release / Archive
Blockchain Association PR / Archive
CoinCenter Article / Archive
The Rage Article / Archive

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