The US Department of the Treasury and the Internal Revenue Service (IRS) have recently released new broker rules for digital assets services providers, which includes a provision requiring DeFi protocols to conduct Know-Your-Customer (KYC) procedures. However, industry experts have criticized this provision, calling it unlawful and outside of the Treasury’s regulatory reach. The regulations mandate that brokers who hold digital assets for customers must report sales and exchanges, as well as track and report user activity. Due to the requirement to report user tax, DeFi front-ends are now obligated to perform KYC processes.
The deadline for digital asset brokers to comply with these new rules is set for Jan. 1, 2025, with an extension for DeFi brokers until Jan. 1, 2027. This discrepancy is based on the lack of proper systems for collecting, reporting, and storing information. The IRS has also indicated that it will address reporting rules for these entities in future regulations. Consensys senior counsel Bill Hughes highlighted that DeFi front-ends will need to report activity from both US and non-US persons. This reporting requirement extends to all digital asset trades, including non-fungible tokens (NFTs) and stablecoins.
The rules offer relief for brokers making good faith efforts to comply, with exemptions from reporting penalties and backup withholding for transactions occurring in 2025. Limited relief from backup withholding will also apply to certain transactions in 2026. In addition, reporting of gross proceeds is required for transactions starting Jan. 1, 2025, while cost-based reporting obligations will begin on Jan. 1, 2026. Real estate professionals using digital assets for closings after Jan. 1, 2026, will also have additional reporting requirements. Certain types of transactions, such as wrapping and unwrapping, liquidity provider, staking, and lending-related transactions, are excluded from immediate reporting requirements.
However, the broker rule has faced backlash from the community, with experts calling it unlawful and burdensome. Consensys senior counsel Bill Hughes believes the rule represents the outgoing administration’s attempt to make a final impact, suggesting that a lawsuit may be filed to challenge the rule’s authority. Jake Chervinsky, chief legal officer at Variant Fund, also criticized the rule, calling it the “dying gasp” of the anti-crypto army. He believes the rule will be challenged in court or by the incoming administration. Alex Thorn, head of research at Galaxy Digital, also expressed concerns about the burdensome nature of the broker rule and its potential for review under the Congressional Review Act.
