In the latest development, the Internal Revenue Service (IRS) approved a most controversial regulation for a DeFi space, mandating DeFi /brokers to share data on customer transactions with the IRS.
According to the announcement, The final regulations “require these brokers to file information returns and furnish payee statements reporting gross proceeds on dispositions of digital assets effected for customers in certain sale or exchange transactions.”
Furthermore, one provision of the new regulation requires DeFi protocol to conduct know-your-customer (KYC) verification.
The new regulation states that DeFi brokers will be required to collect information about their users’ trades and send them a Form 1099. Moreover, they are also required to share these 1099 forms with their clients.
“These regulations will help ensure that all taxpayers play by the same set of rules and have access to the information they need to file their taxes accurately,” stated Aviva Aron-Dine, acting assistant secretary for tax policy.
“Aligning tax reporting requirements for digital assets with reporting for other assets will make filing easier and cheaper for compliant taxpayers while also helping close the tax gap,” he added further.
IRS Faces Backlash for Diminishing DeFi Values
Brokers who make a sincere attempt to follow the new regulations will be exempt from reporting penalties and backup withholding for transactions in 2025. This exemption extends to limited backup withholding relief for some transactions in 2026.
Reporting of gross proceeds will be mandatory for transactions starting from January 1, 2025, whereas obligations for cost basis reporting will begin for transactions on or after January 1, 2026.
Real estate professionals must report additional information when using digital assets for closings from January 1, 2026, onwards.
Some transactions, like wrapping and unwrapping, liquidity provision, staking, and lending, are not subject to immediate reporting requirements.
The IRS intends to provide further guidance on these and other intricate parts of the decentralized finance (DeFi) sector in the future.
This controversial regulation sparked outrage among DeFi lovers, arguing that this can harm the value of decentralization. Also, they believe that the new regulation is beyond the authority of the Treasury and breaches the Administrative Procedure Act.
Also Read: IRS Declares Crypto Staking Reward Taxable Amid Legal Battle
