DeFi Broker Tax Framework: Highlights and Criticism

The US Treasury Department has finally released the long-awaited DeFi broker tax reporting framework in its bid to capture revenue from the growing industry.

According to the released framework, platforms offering trading services to report user transactions with the Internal Revenue Service (IRS).

DeFi Broker Tax Framework: Highlights and Criticism

According to the summary from ConsenSys lawyer Bill Hughes, the reporting requirements from the trading frontend will apply to both US persons and non-US persons. Compliance with the DeFi broker tax reporting framework will commence in 2027.

When compliance commences, the IRS will require DeFi brokers to send Form 1099 to platform users for tax reporting purposes. Ideally, Decentralized Finance (DeFi) protocols, per current operational model, are non-custodial, meaning that users’ biometric information are not kept, alongside with the users’ funds.

With the new reporting framework, this may have to charge in a bid to comply with the DeFi broker tax provisions. In addition to the name and transaction details, market experts believe the new reporting standard might require protocols to include addresses and other sensitive details.

These conditions have drawn uproar from members of the crypto community. Hughes noted that this framework will be accompanied by a lawsuit, possibly in demand for its rollback. The legal expert noted that the tax provisions will impact all asset types, including NFTs and stablecoins.

Treasury/IRS has finalized their DeFi broker tax reporting rule. Trading frontends would have to track and report on user activity – both US persons and non-US persons- starting in 2027. And it applies to the sale of every single digital asset – including NFTs and even…

— Bill Hughes (@BillHughesDC) December 27, 2024

Hughes noted that the US Treasury had completed the DeFi broker tax rules long ago but chose to release it just weeks to the end of the current administration.

Will Donald Trump Roll Back the US Treasury Rules?

The crypto industry started weighing the impact of the tax reporting rules long ago. With the framework now official, the hopes now lie on the incoming Donald Trump administration to change the terms.

The hopes in Donald Trump hinge on the nomination of Scott Bessent as the Treasury Secretary. Unlike Janet Yellen, Scott Bessent is pro-crypto and might consider the plight of industry advocates. Beyond the invasion of privacy, experts say the DeFi broker tax rules is all cost-focused with no positive impact on revenue generation.

The President-elect’s family also pioneered a DeFi outfit, World Liberty Financial, this year. If this framework starts, the outfit might also need to comply, a twist that might encourage some forms of rollbacks or changes to the rules.

Conclusion: The DeFi broker tax framework has sparked significant controversy in the crypto community. While the US Treasury Department aimed to capture revenue from the growing industry, many experts believe the framework is cost-focused and does not consider the impact on users’ privacy and security. With the incoming Trump administration, the hopes lie on changing the terms, but it remains to be seen whether the rules will be rolled back or modified.

FAQs

Q: What is the DeFi broker tax framework?

A: The DeFi broker tax framework is a set of rules released by the US Treasury Department to require DeFi brokers to report user transactions with the Internal Revenue Service (IRS) starting in 2027.

Q: What are the requirements of the reporting framework?

A: The reporting framework requires DeFi brokers to send Form 1099 to platform users for tax reporting purposes. It also might require protocols to include addresses and other sensitive details.

Q: What is the impact of the DeFi broker tax framework?

A: The DeFi broker tax framework has drawn uproar from members of the crypto community. Experts believe it is cost-focused and does not consider the impact on users’ privacy and security. The framework will impact all asset types, including NFTs and stablecoins.

Q: Will Donald Trump roll back the US Treasury rules?

A: The hopes lie on the nomination of Scott Bessent as the Treasury Secretary. Unlike Janet Yellen, Scott Bessent is pro-crypto and might consider the plight of industry advocates.