IRS and Treasury Tighten Tax Rules for Crypto DeFi Platforms
Thursday, Jan 2, 2025 7:43 pm ET
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have finalized new regulations targeting decentralized finance (DeFi) brokers, compelling them to adopt Know Your Customer (KYC) procedures and report on user trading activities. These rules, effective from January 1, 2027, apply to DeFi protocols that directly interact with customers, classifying them as brokers similar to traditional financial entities. This involves collecting and reporting user data, including names, addresses, and transaction details, to the IRS on Form 1099-DA.
The final regulations come after Treasury published final regulations addressing reporting requirements primarily for custodial brokers earlier this year. The final regulations do not treat operators of digital protocols or developers of protocol software as brokers and modify the proposed regulations in ways that limit burdens on brokers while ensuring taxpayers and the IRS receive the information they need.
The IRS estimates that between 650 and 875 digital asset providers will meet the definition of being such a Digital Asset Middleman. The regulations are intended to treat DeFi brokers the same as custodial platforms for tax reporting purposes, but they have stirred controversy among the crypto community. Some critics have argued that these new rules exceed the regulatory authority of the Treasury and could drive the DeFi industry offshore due to compliance challenges and privacy concerns.
Industry leaders and advocacy groups like the Blockchain Association and DeFi Education Fund challenged the regulations legally, citing issues with privacy and the decentralized nature of DeFi platforms which traditionally do not handle user identification. The IRS's latest move is seen by some as a significant shift in how DeFi platforms operate, potentially requiring them to centralize aspects of their service to comply with these new reporting mandates. This could include tracking user identities and transactions across all digital assets, including NFTs and stablecoins.
The backlash includes concerns over the feasibility of compliance for truly decentralized entities and fears that the rules might stifle innovation in the U.S. crypto space. Scroll to Continue Recommended Articles IRS And Treasury Impose New Tax Rules For Crypto DeFi Platforms By CryptoWendyO Logic and Intelligence: What Does 2025 Hold For Blockchain x AI? By Nikolai Kuznetsov Big Picture Thinking: A Predictive Lens Into a Transformative 2025 By Nikolai Kuznetsov If you’re looking for a tax expert, contact Scott today, his website is shown in today’s video! Thanks for watching.

The new regulations are expected to generate a deluge of Form 1099-DA information reporting to the IRS from cryptocurrency brokers, traders, banks, wallet hubs and taxpayers starting on Jan. 1, 2025. The IRS and the Treasury decided to delay the initial requirements for DeFi brokers for two years until the beginning of 2027 in response to feedback on the original proposed regulations.
The final regulations come after Treasury published final regulations addressing reporting requirements primarily for custodial brokers earlier this year. The final regulations do not treat operators of digital protocols or developers of protocol software as brokers and modify the proposed regulations in ways that limit burdens on brokers while ensuring taxpayers and the IRS receive the information they need.
The IRS is aware of the challenges that implementing new reporting requirements can pose, which is why the agency is also providing transitional and penalty relief from reporting and backup withholding rules on certain transactions to help phase-in implementation. Real estate professionals are also required to report the fair market value of digital assets paid by buyers and received by sellers in real estate transactions with closing dates on or after January 1, 2026.
The final regulations provide for an optional, aggregate reporting method for certain sales of stablecoins and certain non-fungible tokens (NFTs) applicable only after sales of these stablecoins and NFTs exceed de minimis thresholds. For PDAP transactions, the regulations require reporting on a transactional basis only if the customer’s sales are above a de minimis threshold.
Finally, basis reporting will be required by certain brokers, for transactions occurring on or after January 1, 2026. Additional guidance to provide transitional relief regarding digital asset transactions includes:
Transitional relief
Notice 2024-56 PDF provides general transitional relief from reporting penalties and backup withholding for any broker who does not timely and accurately file information returns and furnish payee statements for sales and exchanges of digital assets during calendar year 2025, provided that the broker makes a good faith effort to comply with the reporting obligations. Additionally, the notice provides more limited relief from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs.