The United States Internal Revenue Service (IRS) has released final regulations that classify several decentralized finance (DeFi) protocols as brokers. This move has sparked immediate backlash within the crypto industry, with calls for the incoming Congress to overturn the new rules.
New Regulations and Their Impact
The new regulations treat front-end protocols facilitating digital asset transactions as brokers, requiring Know Your Customer (KYC) disclosures of transactions. According to the agency, the regulations will affect up to 875 DeFi brokers. This move has been met with criticism from various stakeholders in the crypto industry.
Backlash and Calls for Overturning
The new rules have sparked a widespread backlash on social media, with many legal experts suggesting that the IRS may be overstepping its authority and infringing constitutional rights. Jake Chervinsky, chief legal officer at venture capital firm Variant, stated:
"This unlawful rule is the dying gasp of the anti-crypto army on its way out of power. It must be struck down, either by the courts or the incoming administration."
Calls for Congressional Review Act
Alexander Grieve, vice-president of government affairs at venture firm Paradigm, echoed a similar sentiment:
"The new pro-crypto Congress can, and should, roll these back via the CRA process next year," he said on X (formerly Twitter).
The Congressional Review Act (CRA) allows Congress to review and potentially disapprove of regulations issued by agencies like the IRS.
DeFi Broker Definition and Exclusions
The DeFi broker definition encompasses platforms performing intermediary functions in facilitating transactions, including a group of persons facilitating transactions ‘whether or not the group operates through a legal entity.’ Miles Jennings, general counsel of a16z Crypto, claimed:
"The rule represents ‘a fantastical expansion of the words ‘effectuate transactions’ to enable the IRS to ban DeFi.’"
According to Miles Fuller, director of government solutions at TaxBit, the definition covers any provider that knows ‘or is in a position to know whether the nature of the transaction involved gives rise to reportable gross proceeds from the sale of digital assets.’ Two specific groups are specifically excluded from the definition: validation services and wallet software providers.
Industry Response and Advocacy
The Blockchain Association has called the rule ‘a final attempt’ to send the US crypto industry offshore. A statement by the group’s CEO, Kristin Smith, said:
"On behalf of the industry, we’re prepared to take aggressive action to fight back. We also look forward to working with the new pro-crypto Congress and Administration to roll back this and other anti-innovation rules."
Expected Impact on Taxpayers
According to the IRS, the new regulations are expected to affect as many as 2.6 million taxpayers.
Related Developments
In related news, the IRS has doubled down on crypto staking taxes, sparking further controversy in the industry. The IRS’s efforts to regulate the crypto space have been met with criticism from various stakeholders, who argue that the agency is overstepping its authority and infringing constitutional rights.
Conclusion
The classification of DeFi protocols as brokers by the US IRS has sparked widespread backlash within the crypto industry. With calls for overturning the new rules and potential use of the Congressional Review Act, it remains to be seen how this situation will unfold in the coming months. One thing is certain: the regulatory landscape for cryptocurrencies continues to evolve, and stakeholders must remain vigilant and proactive in navigating these changes.
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