DeFi Faces IRS Challenges: New Tax Rule Draws Industry Backlash

In a Thinking Crypto podcast, Amanda Tuminelli, Chief Legal Officer at the Defi Education Fund, has discussed the IRS and treasury’s recent rulemaking on digital asset transactions. The IRS finalized a tax reporting rule for defi industry participants on December 27th, which is argued to be too broad to be considered a broker under the statutory definition.

She discussed a recent lawsuit filed against the IRS and the Treasury Department. The lawsuit was in response to a new tax reporting rule for DeFi industry participants that the IRS finalized on December 27, 2024. Amanda explains that the rule could wrongly categorize DeFi platforms as brokers, even though they don’t facilitate transactions on behalf of others. She emphasizes that this could set a dangerous precedent, broadening the definition of a broker beyond its statutory limits. The case is significant as it aims to preserve objections to this rule before its implementation in 2027,

A Pushback Possible?

She noted that the statutory definition of a broker is somebody who, for consideration for money, effectuates transfers of digital assets, assets on behalf of another person. However, she noted that in defi, nobody does that, and here a user directs their own transaction.

She noted the IRS’s interpretation of the definition of a “broker” in the context of decentralized finance (DeFi) transactions. The IRS suggests that front-end services, which do not take custody of funds but assist users in completing transactions, should be classified as brokers. She asserts that the IRS is broadening the definition beyond the statute by including any service that facilitates a transaction, even if they don’t directly handle user data.

 “They say that just because they’re assisting the user, that still somehow meets the definition of a broker. And that’s just simply not what the statute says. That is a huge broadening beyond the statute,” she remarked.

She noted that the IRS’s rule was intended to be implemented in 2025, but it is expected to be future-oriented and not impose a reporting obligation until January 1, 2027. 

However, with an incoming pro-crypto administration, she expects that there may be pushback or rollback of the rule. Congress can use its ability to review the rule under the Congressional Review Act and disapprove of it, ensuring it doesn’t have effect before the deadline.

Optimism Ahead With Trump Administration

Tumelli also discusses the upcoming election of pro-crypto President Donald Trump, who is expected to take the crypto industry seriously. Another significant factor is the appointment of Paul Atkins, who will replace Gary Gensler, who was criticised for his hostile approach towards crypto. There are also expectations that the SEC under its new chair will drop some non-fraud cases and focus on fair rules to avoid the need for piecemeal lawsuits.

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Will SEC Drop Non Fraud Cases?

When asked if the new SEC chair is going to drop some of the non-fraud cases, she suggested that there’s going to be a shift in attitude. While she is not sure if the SEC will just drop the lawsuits due to the resources already spent, however, the SEC may pursue favorable settlements or consent decrees, where both parties negotiate a resolution, and the court oversees its implementation.

Notably, Amanda anticipates a shift in SEC leadership under new Chair Paul Atkins, which may lead to favorable settlements or clearer rules for crypto businesses. She also touches on the DOJ’s approach toward developers, particularly in cases involving Tornado Cash, expressing concerns over the DOJ’s broad legal theory that developers could be held responsible if their neutral software is misused by bad actors.

Overall, Amanda remains cautiously optimistic about the potential for positive change in 2025, hoping for more regulatory clarity and a reduction in litigation for the crypto industry.