The IRS finalized a rule (T.D. 10021) for the reporting of gross proceeds by digital asset brokers on Dec. 30, but delayed the implementation until 2027. Industry associations have already filed a lawsuit to block the regulations before they ever take effect.
The rules, which follow a prior rulemaking (T.D. 10000) from July, apply broker reporting requirements to so-called decentralized finance(DeFi), a term primarily applied to transactions of digital assets that do not involve a traditional intermediary, like a trading platform provided by a registered company. T.D. 10021 does this by providing a definition of digital asset middleman, an issue that the IRS delayed addressing in T.D. 10000 because of the complex and contentious nature of the issue.
The broker reporting requirements were put into law by the 2021 Infrastructure Investment and Jobs Act, better known (informally) as the Bipartisan Infrastructure Law, which expanded existing broker reporting requirements under Sections 6045 and 6045A to include digital assets. The law initially would have required the new reporting for returns filed after Dec. 31, 2023 (for 2023 transactions), but the IRS delayed the rules so they apply only to transactions occurring on or after Jan. 1, 2024 (with penalty relief for good faith efforts to comply). The provision was designed as a revenue offset and the Joint Committee on Taxation estimated the provision would raise nearly $28 billion for the federal government over 10 years.
From the onset, digital asset advocates have raised concerns over the provisions, which they viewed to be overly broad for an asset class originally meant for peer-to-peer transactions. But legislative efforts launched almost immediately to narrow the definition failed to become law.
The latest rule requires DeFi industry participants to furnish information “showing the name and address of each customer, with such details regarding gross proceeds and such other information as the Secretary may by forms or regulations require.” The IRS acknowledged the difficulty some DeFi entities will have collecting and reporting the required information and offered transition relief providing that their inclusion as brokers will apply only for transactions occurring on or after Jan. 1, 2027. When in effect, the rules will require DeFi entities ranging from individuals to software to send Forms 1099-DA to individuals and other entities they conduct business with. Much of the rulemaking also draws parallels between the traditional securities industry and digital asset trading, a comparison the industry has fought to avoid due in part to the strict reporting requirements around securities, and the argument that digital assets reflect an entirely new asset class.
In a suit filed on Dec. 27, in anticipation of the formal publication of the rule in the Federal Register, the Blockchain Association, Texas Blockchain Council, and DeFi Education Fund, which advocate on behalf of the digital asset industry and cryptocurrency holders, filed a lawsuit including a request for an immediate injunction over the new rule. The suit argues that Treasury effectively changed the definition of “broker” used in the legislation that led to the new rule.
The new Trump administration, expected to be cryptocurrency-friendly, could also seek to undo the rulemaking before the suit plays out in court, or the rules are scheduled to take effect in 2027. Trump ordered a 60-day delay of all recently finalized rules, pending review by the Office of Management and Budget director, as part of a general freeze meant to give Trump appointees a chance to review and weigh in on so-called “midnight rule-makings” issued in the final days of the Biden administration. This particular rule is already the target of two Congressional Review Act resolutions, one in the House of Representatives and a corresponding one in the Senate. These could allow for a party-line repeal of the rule by Congress, though some Democrats may also support repeal.
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