IRS Rule Designating DeFi Front-Ends As Brokerages Sparks Industry Backlash

According to Cointelegraph, the Internal Revenue Service (IRS) has introduced a new reporting rule that classifies decentralized finance (DeFi) front-ends as brokerages, causing significant concern within the cryptocurrency sector. Alex Thorn, head of research at Galaxy Digital, has identified three potential paths for DeFi platforms if the IRS does not retract this rule. Thorn suggests that DeFi services could choose to comply with the IRS's reporting requirements and accept their designation as brokerages. Alternatively, they might attempt to block users from the United States or cease smart contract upgrades and revenue generation. Thorn elaborated that DeFi applications without a front-end website, non-upgradeable contracts, and those that do not receive fees from digital asset transactions could potentially avoid being classified as brokers under the new proposal. He further explained that highly decentralized applications might not be able to comply with broker reporting requirements due to their structure. The IRS's final reporting rule has faced significant opposition from crypto industry advocacy groups and executives, leading to litigation against the agency. The rule, issued on December 27, 2024, states that 'trading front-end service providers,' including decentralized exchanges, will be treated as brokerages. If implemented, this change is set to take effect in 2027. Industry leaders have criticized the rule, describing it as an overreach by the government. Bill Hughes, an attorney at Consensys, highlighted the timing of the rule's release, suggesting it was strategically placed during a holiday period to minimize immediate backlash. In response, a joint lawsuit was filed against the IRS by the Texas Blockchain Council, the Blockchain Association, and the DeFi Education Fund on the same day the rule was announced. The lawsuit argues that the rule represents unlawful and unconstitutional overreach by the Department of the Treasury and the IRS.