IRS Faces Legal Pushback Over New DeFi Compliance Rules

Three major crypto advocacy groups have launched a lawsuit against the U.S. Internal Revenue Service (IRS), alleging that the agency overreached its authority by classifying decentralized finance (DeFi) platforms as brokers under newly finalized regulations.

On December 27, the IRS and the Treasury Department expanded the definition of a “broker” to encompass decentralized exchanges and other DeFi front-end services. This move compels those platforms to report all digital asset transactions, including details about taxpayers involved, in a measure intended to bolster transparency in the crypto market. The mandate takes effect in 2027.

Critics in the crypto community argue that by extending broker obligations to DeFi operators, the IRS imposes excessive compliance burdens on software developers, particularly those creating trading interfaces. Bill Hughes, a lawyer at Consensys, labeled the timing of the rule’s release—during a holiday period—as a calculated decision “to minimize industry pushback.” Miles Jennings, General Counsel at a16z Crypto, described the new requirement as “a drastic overreach” aimed at curbing DeFi operations.

Source: X

Legal Challenge

Three advocacy organizations—the Blockchain Association, DeFi Education Fund, and the Texas Blockchain Council—filed a joint lawsuit on December 27. They assert that the IRS’s expanded broker definition violates the Administrative Procedure Act (APA) and infringes upon privacy and constitutional rights.

“This case is about unlawful and unconstitutional overreach by the Department of the Treasury and the Internal Revenue Service,” states the lawsuit.

According to a statement attributed to Marisa Coppel, Head of Legal at the Blockchain Association, “The IRS and Treasury have gone beyond their statutory authority in expanding the definition of ‘broker’ to include providers of DeFi trading front-ends even though they do not effectuate transactions. Not only is this an infringement on the privacy rights of individuals using decentralized technology, it would push this entire, burgeoning technology offshore.”

Industry and Legislative Response

Prominent figures in the industry have called on Congress to intervene. Alexander Grieve, Vice President of Government Affairs at Paradigm, encouraged lawmakers to utilize the Congressional Review Act (CRA) process next year to overturn the new regulations. “Treasury/IRS just dropped their DeFi broker regs… The new pro-crypto Congress can, and should, roll these back via the CRA process next year,” Grieve wrote.

U.S. representatives French Hill and Patrick McHenry have already signaled opposition to the new requirements. In a post on social media, Hill criticized the move as “an overreach by the Treasury” and “a blatant and poorly crafted attempt to target DeFi.” He also suggested that finalizing the measure “in the final days of the Biden-Harris Admin” bypassed bipartisan objections.

Industry observers, including Alex Thorn of Galaxy Digital, have highlighted the potential impacts on decentralized platforms. Thorn suggests DeFi operators face three main choices if the rule remains in place:

1. Comply with the IRS reporting requirements and accept the brokerage designation,
2. Restrict access for U.S. users to bypass reporting obligations, or
3. Limit or abandon any front-end functionalities and revenue generation, effectively operating through highly decentralized, autonomous smart contracts without collecting fees.

Thorn noted, “Extremely decentralized applications are not in a position to know and thus could not comply with broker reporting requirements.”

With fresh legal battles underway, the crypto community is bracing for lengthy court proceedings and potential legislative intervention in the coming year.