Gushiken Yona
A rebellion brews in the digital realm: the cryptocurrency industry is not backing down, as three major advocacy groups file a lawsuit against the Internal Revenue Service (IRS), challenging new rules that could fundamentally alter the way DeFi operates. The fight is on, and the outcome is far from certain.
Conversations about the future of decentralized finance moved to the courtroom. The DeFi Education Fund, the Blockchain Association, and the Texas Blockchain Council contested the IRS’s move to classify DeFi platforms as “brokers.” arguing it oversteps the agency’s authority, violates the Administrative Procedure Act (APA), and is unconstitutional.
Lawsuit vs. The IRS
The lawsuit, filed on December 27, 2024, challenged the IRS’s final “broker” rulemaking, published in the Federal Register the same day. This rule expands the definition of a “broker” to include decentralized exchanges (DEXs) and other front-end platforms facilitating digital asset transactions.
Specifically, these regulations require DeFi platforms to collect and report detailed information on crypto transactions. This includes gross proceeds, transaction dates, and user identities (names, addresses, TINs) using Form 1099-DA. These rules, slated for 2027, aim to enhance transparency and combat tax evasion.
DeFi Groups Push Back IRS Rulemaking
However, the crypto groups argued the IRS and Treasury have exceeded their authority, as DeFi platforms don’t “effectuate” transactions like traditional brokers. They also claimed the rules impose undue burdens on software developers, who often lack access to the required user data, potentially stifling innovation and pushing entrepreneurs offshore.
“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,” said Marisa Coppel, Head of Legal, Blockchain Association. “Not only is this an infringement on the privacy rights of individuals using decentralized technology, it would push this entire, burgeoning technology offshore.”
The lawsuit also alleges violations of the APA and the Constitution, arguing the IRS did not follow proper procedures and infringes on user privacy. The groups point out that public warnings during the rule’s comment period were ignored.
“We are incredibly disappointed in today’s decision by the Treasury and the IRS to finalize the misguided and unfairly sweeping DeFi portion of their ‘broker’ rulemaking,” said Miller Whitehouse-Levine, CEO, DeFi Education Fund. “This unfortunate rulemaking is a direct threat to financial innovation, and we intend to fight it.”
The IRS’s move has sparked controversy, with industry leaders criticizing the timing and calling for legislative intervention.
“The new IRS broker rule imposes unrealistic expectations on the digital asset ecosystem,” said Texas Blockchain Council President Lee Bratcher. “This regulatory overreach risks driving critical development overseas.”
The Broader Impact on DeFi and Crypto Innovation
The lawsuit came amid increasing regulatory scrutiny of the crypto industry. The outcome could significantly impact the future of DeFi and the broader digital asset ecosystem.
The legal battle is likely to be protracted, with the potential to reshape the regulatory landscape for digital assets in the U.S. The case will be closely watched by both the crypto industry and policymakers, as it raises fundamental questions about the balance between innovation, regulation, and individual rights.
The fight is on, and the outcome is far from certain.
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Yona has no crypto positions and does not hold any crypto assets. This article is provided for informational purposes only and should not be construed as financial advice. The Shib Daily is an official media and publication of the Shiba Inu cryptocurrency project. Readers are encouraged to conduct their own research and consult with a qualified financial adviser before making any investment decisions.
