Three prominent pro-crypto groups – the Blockchain Association, the DeFi Education Fund and the Texas Blockchain Council – have filed a lawsuit against the US Internal Revenue Service (IRS).
The lawsuit challenges the IRS and Treasury Department’s recent decision to classify decentralized finance (DeFi) platforms as broker-dealers, a move that has sparked significant controversy within the crypto industry.
IRS Broker Redefinition Triggers Legal, Legislative Issues
On December 27, the IRS finalized new regulations targeting the DeFi sector by expanding the definition of a broker-dealer to include decentralized exchanges and other front-end platforms.
This adjustment requires these entities to report all transactions of cryptocurrency and other digital assets, including details on the taxpayers involved. Due to be applied from 2027, these regulations aim to improve the transparency of digital asset transactions.
However, cryptocurrency advocacy groups dispute that the IRS’s extension of broker-dealer status to DeFi platforms oversteps the statutory authority granted to the agency. They also argued that the move violated the Administrative Procedure Act (APA) while deeming the action unconstitutional.
Additionally, they argue that the rule imposes excessive compliance burdens on software developers, particularly those who create commercial interfaces. They say this could seriously hamper innovation and put a strain on American entrepreneurs.
“The IRS and Treasury have gone beyond their statutory authority by expanding the definition of “broker” to include providers of DeFi trading interfaces, even if they do not transact transactions. Not only is this a violation of the privacy rights of individuals using decentralized technology, but it would push all of this booming technology overseas,” said Marisa Coppel, head of legal at the Blockchain Association.
At the same time, the regulatory change has also sparked a strong backlash from the broader crypto community, with several industry leaders calling for legislative intervention.
Bill Hughes, an attorney at Consensys, criticized the rule’s release during the holiday season as a strategic move to minimize industry pushback. Similarly, Miles Jennings, general counsel at a16z Crypto, described the rule as a drastic overreach intended to crack down on DeFi operations.
Additionally, Alexander Grieve, vice president of government affairs at Paradigm, urged the next Congress to reevaluate and potentially reject these new stipulations.
US lawmakers like French Hill and Patrick McHenry have already spoken out against the move, suggesting they might object.
“The Biden-Harris Treasury chose to defy both Democrats and Republicans in Congress by finalizing its controversial broker-dealer tax reporting rule today. This rule is an overreach by Treasury, a blatant and ill-conceived attempt to target DeFi, and should never have been finalized in the final days of the Biden-Harris administration,” Hill said.
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