The U.S. Internal Revenue Service (IRS) has thrown the decentralized finance (DeFi) industry into turmoil with its recently finalized reporting rule that designates DeFi front-ends as brokerages. Issued on December 27, 2024, the rule mandates these platforms to comply with broker reporting requirements, a move that has sparked outcry across the crypto sector.
Limited Options for DeFi
Alex Thorn, head of research at Galaxy Digital, has identified three potential paths forward for DeFi platforms under this regulation. According to Thorn, these platforms can either comply and function as brokerages, block access for U.S. users, or adopt extreme decentralization by forgoing upgrades and revenue generation.
Thorn emphasized that only highly decentralized platforms—those without front-end interfaces, non-upgradeable smart contracts, and no fee collection mechanisms—could potentially avoid the “broker” designation. “Said another way, extremely decentralized applications are not in a position to know and thus could not comply with broker reporting requirements,” he noted.
Industry Pushback and Legal Action
The announcement by IRS has ignited fierce opposition from the crypto industry, with executives and advocacy groups labeling the rule as overreach. Bill Hughes, an attorney for blockchain software firm Consensys, criticized the IRS for releasing the rule at the tail end of the year during the holiday season. “This rule has been ready to go for a while. They dump it…as if we wouldn’t notice or make an absolute ruckus over it,” Hughes stated.
On the same day the rule was published, a coalition of crypto advocacy groups—including the Texas Blockchain Council, Blockchain Association, and DeFi Education Fund—filed a lawsuit against the IRS. The lawsuit alleges that the rule represents unconstitutional overreach by the Department of the Treasury and the IRS.
Industry leaders have also called on Congress to step in and block the rule, arguing that it could stifle innovation and drive DeFi platforms away from U.S. markets. If implemented, the reporting requirements will take effect in 2027, giving platforms some time to adjust or push back.
The controversy has reignited debates over the balance between regulatory compliance and innovation in the crypto space.
