- DeFi groups file a lawsuit against the IRS’s expanded “broker” rule.
- Lawsuit claims new IRS rule threatens DeFi innovation and privacy.
- Industry leaders warn of DeFi migration due to IRS regulation.
A fierce legal showdown is underway as major crypto groups file a lawsuit against the IRS. The challenge targets new regulations that could redefine DeFi platforms and spark significant shifts in the digital finance landscape.
IRS Controversial New DeFi Broker Rule
A legal battle has come up over new IRS regulations targeting decentralized finance (DeFi) platforms. Three prominent crypto advocacy groups have filed a lawsuit against the Internal Revenue Service (IRS). The lawsuit seeks to challenge the classification of decentralized exchanges (DEXs) and other DeFi platforms as “brokers” by the IRS. The groups argue that the new rules violate constitutional rights and show an overreach of the IRS’s authority.
The lawsuit, filed on December 27, 2024, challenges the final “broker” rule issued by the IRS the same day. This regulation classifies DeFi platforms that facilitate digital asset transactions as brokers.
Therefore, these platforms would be required to report actual transaction dates, gross proceeds and user identities including names and tax identification numbers on Form 1099-DA. The rules are set to take effect in 2027 with the purpose to increase transparency and reduce tax evasion in the digital asset space.
The Crypto Advocacy Groups Vs IRS Lawsuit
However, the DeFi groups argue that the IRS has overstepped its authority by classifying platforms that do not directly execute transactions. They state that DeFi platforms provide a front-end interface for users to transact, unlike traditional brokers.
The groups also claim that the rules place unreasonable obligations on software developers. They note that the developers do not have the relevant user data which could hinder innovation and push entrepreneurs to operate outside the United States.
The lawsuit challenges the IRS’s actions on several grounds like violations of the Administrative Procedure Act (APA) and the Constitution. The plaintiffs argue that the IRS failed to follow proper procedures during the rulemaking process and infringed on user privacy.
Moreover, they argue that the regulatory overreach by the IRS undermines the principles of decentralized technology and may lead to reduced financial innovation.
Impact of new IRS rule
Industry leaders have also expressed concern over the new rules and some referred to them as a direct threat to the future of decentralized finance.
Critics warn that the regulations could drive DeFi developers and entrepreneurs to relocate to regions with more favorable regulatory policies. The Texas Blockchain Council has voiced opposition and stated that the regulatory overreach could push blockchain development to other countries.
The legal challenge represents the increased tensions between the crypto industry and regulatory authorities. The outcome of the lawsuit could have major implications for the future of decentralized finance and the regulation of digital assets in the United States. The crypto advocacy groups and the IRS are preparing for a long legal battle over the future and regulation of DeFi.