Crypto Industry Groups Sue IRS Over Broker Reporting Rule

The crypto industry is pushing back against the U.S. Internal Revenue Service (IRS) after the agency finalized new regulations that classify decentralized finance (DeFi) platforms as brokers, requiring them to report customer information. Three prominent pro-crypto groups — the Blockchain Association, DeFi Education Fund, and the Texas Blockchain Council — have initiated legal action against the IRS, challenging the new rules that they argue overreach the agency's authority and infringe on constitutional rights.

The lawsuit, filed on December 27, 2024, contends that the IRS's expansion of the broker definition to include DeFi platforms is an attempt to regulate the crypto industry through enforcement actions rather than clear legislation. The plaintiffs argue that the new rules violate the Administrative Procedure Act (APA), infringe on constitutional rights, and impose undue compliance burdens on software developers, which could hinder innovation in the U.S. crypto sector.

The IRS's finalized regulations, published in the Federal Register on December 16, 2024, extend the definition of financial brokers to platforms operating in decentralized finance. The rule requires brokers to report detailed data on clients and their gross proceeds, including DeFi front-end service providers. The agency maintains that these new rules are necessary to close the information gap with respect to digital assets and combat tax evasion.

However, the crypto industry groups argue that the IRS's approach is flawed and could have significant negative consequences for the U.S. crypto market. They contend that the new rules could discourage the use of DeFi platforms by users concerned about the privacy of their data, push developers and innovators to move their activities outside of the USA, and harm the development of the crypto sector in the country.

The lawsuit seeks to block the new regulations and force the IRS to reassess its approach to regulating the crypto industry. The outcome of the lawsuit will significantly influence the crypto industry's compliance with the broker reporting rule and could have broader implications for the growth and innovation of the sector in the U.S. and globally.

As the lawsuit progresses, the crypto industry will be closely watching the outcome, as it could shape the regulatory landscape for the sector in the U.S. and beyond. The potential implications for the broader adoption and growth of DeFi platforms, as well as the IRS's ability to enforce tax regulations on the crypto industry, will depend on the court's decision.