IRS finalizes controversial tax reporting rule for brokers, punts decision on DeFi

The Internal Revenue Service released late Friday the latest version of its controversial “broker rule” guidance.

The tax agency first published new proposed regulations on tax reporting requirements for cryptocurrency brokers in August 2023, stoking fears that ambiguous language could harmfully impact many parts of the crypto industry from wallet providers to decentralized exchanges.

“Good news: They agree that custodial brokers are, well, brokers,” Coin Center Chief Communications Office Neeraj Agrawal said in a post on X. “Our concern is whether or not a self-custodial application (like a DEX) that is just code with no central authority would be considered a broker too.”

In other words, exchanges like Kraken and Coinbase will be subject to the new rules, which will go partially into effect in 2025. However, rules that would have imposed potentially impossible and privacy-invasive reporting and KYC requirements on decentralized, non-custodial protocols will wait and see.

“The Treasury Department and the IRS would benefit from additional consideration of issues involving non-custodial industry participants,” the filing reads.

Coin Center was one of several firms that pushed back against the IRS’s initial expanded definition of a broker that appeared to rope in non-custodial, self-executing crypto platforms. Just last week , the Blockchain Association also complained about the potential for hefty compliance costs of the rule.

The proposed regulations — which build on efforts to expand IRS regulation over crypto transaction tax reporting in the Infrastructure Investment and Jobs Act from 2021 — would not only have expanded the number of entities treated as brokers but also vastly expand the type of entities obligated to report under 1099 tax reporting requirements (and crypto-specific 1099-DA form).

In its public letter, the Blockchain Association estimated the law would add 8 billion 1099-DA tax forms to process and compliance costs of $254 billion. This is, in part, because nearly any trade involving a blockchain-based asset — from NFTs to stablecoins — would fall under the 1099 reporting umbrella, Bitwave CEO Patrick White wrote in a recent op-ed for The Defiant .

Agrawal notes the IRS seems to have taken note of the pushback and delayed making final determinations regarding crypto. It was a point echoed by Consensys Senior Counsel and Director of Global Regulatory Matters Bill Hughes, who clarified the guidance “does NOT finalize rules pertaining to unhosted wallets and related non-custodial software offerings.”

“They say those offerings are still under review as possibly being brokers, and they will finalize their status later,” he added .