Joint Lawsuit Filed Against the United States Internal Revenue Service (IRS)
On December 27, the IRS issued final regulations requiring brokers to report digital asset transactions, expanding existing reporting requirements to include front-end platforms, such as decentralized exchanges (DEXs). The new rules mandate that brokers disclose gross proceeds from sales of cryptocurrencies and other digital assets, including information regarding taxpayers involved in the transactions. These regulations are set to take effect in 2027.
Blockchain Association Fights Back Against Unconstitutional Regulations
In response to the new rules, the Blockchain Association and the Texas Blockchain Council filed a lawsuit against the IRS. According to Kristin Smith, CEO of the Blockchain Association, "Today we’re taking action, filing a lawsuit that argues today’s broker rulemaking violates the Administrative Procedure Act and is unconstitutional."
"We stand with our nation’s innovators and will continue working to ensure the future of crypto – and DeFi – is here in the United States," added Smith.
Consequences for Blockchain Software Developers
Under the new rules, if a decentralized finance (DeFi) platform facilitates the exchange or sale of digital assets — even through smart contracts — and exercises sufficient control or influence over the transaction process, it could meet the definition of a broker. The IRS’ rulemaking puts "unlawful compliance burdens on software developers" building front-end trading infrastructure, wrote the Blockchain Association.
This decision raises significant concerns for blockchain software developers, considering that other code developers have already been sanctioned for how their software is being used. For example, Tornado Cash developer Alex Pertsev was found guilty of money laundering by Dutch judges at the s-Hertogenbosch Court of Appeal on May 14. He was sentenced to five years and four months for allegedly laundering $1.2 billion worth of illicit funds despite Tornado Cash being a non-custodial cryptocurrency mixer.
Impact on DeFi Users’ Privacy Rights
The IRS’s new regulation is an "infringement" on the privacy rights of DeFi users, according to some legal experts. The IRS’ new definition of "broker" includes DeFi trading front-ends, which do not effectuate transactions, wrote 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. Blockchain Association continues to stand with the innovators and users of DeFi, and will continue to fight this misguided rulemaking…."
Scope of the Regulations
The IRS’ rules will apply to digital asset sales starting in 2027. Brokers will need to begin collecting and reporting the necessary data for digital asset transactions starting in 2026.
According to the IRS’ estimations, between 650 and 875 estimated DeFi brokers and up to 2.6 million US taxpayers will be affected by these final regulations.
A Growing Concern for the Blockchain Community
The Blockchain Association’s lawsuit against the IRS is a significant development in the ongoing debate about cryptocurrency regulation. The blockchain community has long been concerned about over-regulation, which can stifle innovation and drive businesses offshore.
As the regulatory landscape continues to evolve, it is essential for stakeholders to remain informed and engaged. Stay up-to-date with the latest developments in the world of cryptocurrency and blockchain technology by following Finance Redefined’s newsletter, a weekly toolkit that breaks down the latest DeFi developments, offers sharp analysis, and uncovers new financial opportunities to help you make smart decisions with confidence.
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