Congress Repeals IRS DeFi Broker Rule, 70-28 Senate Vote

The United States Congress recently voted to repeal the Internal Revenue Service’s (IRS) controversial decentralized finance (DeFi) broker rule, marking a significant victory for the crypto industry. President Trump subsequently finalized the repeal on Thursday, effectively ending the measure.

However, this victory is likely to be temporary. In December 2024, the IRS proposed a broad rule requiring DeFi platforms to adhere to standard crypto broker tax rules, including extensive user Know Your Customer (KYC) procedures and other disclosures. The crypto industry immediately pushed back, with numerous blockchain groups filing lawsuits against the IRS shortly after the rule was announced.

DeFi platforms are not designed to collect such detailed information, and the proposed rule contradicted DeFi’s core principles of protecting privacy while maintaining transaction transparency. Fortunately, this rule is expected to be entirely scrapped under the current administration, following a 70-28 vote against the ruling in the Senate on March 26. This vote came after the House's 292-132 vote on March 11 and the Senate's earlier 70-27 vote on March 4, both in favor of repealing the IRS DeFi broker rule.

If the rule had remained in place, it would have significantly impacted the U.S. crypto industry and innovation beyond just DeFi. As the operator of a crypto tax platform, the author noted that compliance would have become much more costly and complicated. However, the repeal of this rule does not mean the end of regulatory challenges for the crypto industry.

This repeal was relatively straightforward because the rule was seen as overly burdensome and unworkable by many government officials. However, the IRS may return with a more nuanced and carefully crafted rule targeting DeFi. The agency is likely to continue its efforts to expand its reach into the crypto space, as it believes there is significant uncollected crypto tax revenue. The IRS may also increase audits on U.S. crypto users to ensure accurate filings.

The crypto industry must be proactive in pushing for regulatory clarity on DeFi to prevent misinformed and overreaching rules from being implemented again. While crypto advocacy groups are already working on this, the industry needs to be even more persuasive in advocating for rules that distinguish true brokers from self-executing smart contracts, ensure fair tax treatment for DeFi participants, and provide clear reporting guidance without stifling innovation.

With a more pro-crypto environment in Washington under the current administration, there is an opportunity to get regulations right before the pendulum swings back toward aggressive enforcement. The industry has a four-year window to establish a workable framework and ensure these rules are fully passed, clarified, and set into law. Failure to do so could result in an even harsher regulatory regime under a future administration less friendly to decentralized technologies.

The IRS’s DeFi broker rule serves as a warning: until there is a workable framework in place, regulators will continue attempting to impose harsh rules on a technology they barely understand. The crypto industry must remain vigilant and proactive to avoid facing even more challenging regulatory hurdles in the future.