The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have released the final version of their Broker Regulations for digital asset service providers. This includes provisions that require DeFi protocols to implement know-your-customer (KYC) procedures.
Industry experts have already criticized the new provisions as illegal and outside the scope of the Treasury Department's regulations.
The regulation requires brokers that own digital assets on behalf of their customers (including DeFi front-ends as brokers) to report sales and exchanges, and to track and report user activity.
The new rules will require DeFi frontends to perform a KYC process, as brokers will need to report user taxes.
Digital asset brokers must comply with the new rules by January 1, 2025, but this obligation only applies to DeFi brokers by January 1, 2027. The difference in the starting period is based on the lack of a suitable system for backup, collection. , reporting and storing information.
Additionally, the IRS has indicated that it intends to address reporting rules for these entities in future regulations.
ConsenSys Senior Advisor Bill Hughes emphasized that DeFi front ends will also be required to report activity from both US and non-US persons.
Additionally, the report applies to all traded digital assets, including non-fungible tokens (NFTs) and stablecoins, despite crypto industry insiders insisting on a narrower definition. .
Transition period and exclusions
The rule provides exemptions from reporting penalties and backup withholding for transactions occurring in 2025 for brokers that make a good faith effort to comply with the new rule. Limited backup withholding relief also applies to certain transactions in 2026.
Additionally, gross revenue reporting will be required for transactions occurring after January 1, 2025, and cost-based reporting will begin for transactions occurring after January 1, 2026.
Additional reporting requirements apply to real estate professionals who use digital assets for closings after January 1, 2026.
In particular, certain types of transactions are excluded from immediate reporting requirements. These include wrapping and unwrapping, liquidity providers, staking, and lending-related transactions.
However, the IRS plans to issue future guidance to address these and other complex aspects of the DeFi ecosystem.
Community backlash
Hughes said the broker rule shows that the outgoing administration is “not going away quietly.” He believes the rule exceeds the Treasury Department's authority and will be sued for violating the Administrative Procedure Act.
Following the lawsuit, the rule will likely be reviewed by Congress and may be rejected because it overturns Staff Accounting Bulletin (SAB) No. 121.
Jake Cherbinski, Chief Legal Officer of Valiant Funds, said: called He said the rule is illegal and is a “death gasp” for the anti-crypto forces that are losing power. He added:
“This must be struck down by the courts or the next administration.”
Alex Thorne, head of research at Galaxy Digital, said: said Broker rules are “very burdensome,” he said, adding that they would likely be overhauled through the Congressional Review Act.
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