The U.S. 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 requiring DeFi protocols to enable Know-Your-Customer (KYC) procedures to be carried out.
Industry experts have already criticized the new provision as illegal and beyond the reach of Treasury regulators.
The regulations require brokers who take possession of digital assets on behalf of clients, including DeFi front-ends as brokers, to report sales and exchanges and track and report user activity.
Since a broker must report user taxes, the new rule requires DeFi front-ends to perform KYC processes.
While digital asset brokers must comply with the new rules by January 1, 2025, the obligations will only apply to DeFi brokers from January 1, 2027. The different start periods are based on the lack of proper systems for backing up, collecting, reporting and storing information.
In addition, the IRS has indicated that it will address reporting rules for these entities in future rulemakings.
Consensys senior counsel Bill Hughes emphasized that DeFi front ends would also be required to report activities of both US and non-US persons.
Additionally, the reporting will be applied to all traded digital assets, including non-fungible tokens (NFTs) and stablecoins, despite crypto industry players calling for narrower definitions.
Transition period and exclusions
The rules provide brokers who make good faith efforts to comply with the new rules with relief from reporting penalties and backup withholding for transactions occurring in 2025. A limited exemption from backup withholding will also apply on certain transactions in 2026.
In addition, gross receipts reporting is required for transactions conducted on or after January 1, 2025, while cost-based reporting requirements take effect for transactions on or after January 1, 2026.
Additional reporting requirements apply for real estate professionals using digital assets for closings on or after January 1, 2026.
Notably, certain types of transactions are excluded from immediate reporting requirements. These include packing and unpacking, liquidity providers, staking and credit-related transactions.
However, the IRS plans to issue future guidance to address this and other complex aspects of the DeFi ecosystem.
Community response
Hughes stated that the broker rule ensures that the outgoing administration “doesn’t leave quietly.” He believes a lawsuit will be filed, claiming the rule falls outside the purview of the Treasury Department and violates the Administrative Procedure Act.
After the trial, the rules will likely be revised by Congress, where they could be disapproved, citing the nullification of Staff Accounting Bulletin (SAB) 121.
Jake Chervinsky, chief legal officer at Variant Fund, called the rule illegal and said it is the “dying sigh” of the anti-crypto army on its way out of power. He added:
“It must be overturned, either by the courts or by the new government.”
Alex Thorn, head of research at Galaxy Digital, declared that the broker rule is “extremely burdensome,” adding that it will likely be reviewed by a Congressional Review Act.