The US Department of the Treasury and the Internal Revenue Service (IRS) have released the final version of their brokerage rules for digital asset service providers, which include provisions on requiring DeFi protocols to perform “know your customer” (KYC) procedures.
Industry experts have already criticized the new provision as illegal and outside the regulatory scope of the Treasury Department.
The regulations require brokers who acquire digital assets on behalf of clients, including Defy Frontend as a broker, to report sales and exchanges and to track and report user activity.
Since a broker must report user taxes, the new rule requires DeFi defaulters to perform KYC processes.
Although digital asset brokers must comply with the new rules by January 1, 2025, the obligations only apply to DeFi brokers until January 1, 2027. Different courses of initiation are based on the lack of proper systems for backup and collection, reporting and storage of information.
In addition, the IRS indicated that it will review the reporting rules for these entities in future regulations.
Consensus Senior Advisor Bill Hughes highlighted it DeFi defaults must also report the activities of US and non-US individuals.
Additionally, despite crypto industry players favoring narrower definitions, the report applies to any traded digital asset, including non-fungible tokens (NFTs) and stablecoins.
Transfer period and exclusions
The rules exempt brokers who make good faith efforts to comply with the new rules from reporting penalties and backup withholding for transactions that occur in 2025. Limited backup deduction discounts will apply to certain transactions in 2026.
In addition, gross receipts reporting is required for transactions that occur on or after January 1, 2025, while cost-based reporting obligations begin for transactions on or after January 1, 2026.
Additional reporting requirements apply to real estate professionals using digital assets for closings on or after January 1, 2026.
It should be noted that certain types of transactions are exempted from immediate reporting requirements. These include packaging and unbundling, liquidity providers, equity and loan related transactions.
However, the IRS plans to issue future guidance to address these complex aspects of the DeFi ecosystem.
Community reaction
Hughes stated that the broker rule represents an outgoing administration that is “not going away quietly.” He believes that a complaint will be filed with the claim that this rule is beyond the authority of the treasury and against the law of administrative procedure.
After the lawsuit, the rules will likely be reviewed by Congress, where they could be struck down citing the repeal of Staff Accounting Bulletin (SAB) 121.
Jake Chervinsky, Chief Legal Officer at Variant Fund. called The law was unconstitutional, saying it was the “deadly breath” of the anti-crypto army on its way out of power. He added:
“This should be overturned by the court or the next administration.”
Alex Thorne, head of research at Galaxy Digital, expressed that the broker rule is “too burdensome,” adding that it will likely be examined by the Congressional Review Act.
