IRS targets DeFi brokers with new tax reporting rules set for 2027

The IRS is going after decentralized finance (DeFi) brokers with a vendetta. If left, starting in 2027, these brokers will be required to report every dime made in crypto sales.

The new rules fall under section 6045 of the Internal Revenue Code and are part of this big push to extend traditional tax regulations to the crypto industry. So brokers, as defined under these updated laws, will have to submit detailed reports on customer transactions.

A crackdown on non-custodial players

These rules don’t just target centralized exchanges like Binance and Coinbase. Oh no, the IRS has its sights set on DeFi’s golden promise: decentralization. Smart contracts, automated platforms, and even non-custodial wallets (tools that let users stay in control of their private keys) aren’t safe anymore.

The IRS has made up a new phrase, “digital asset middlemen,” to call non-custodial operators who play a role in crypto transactions. So basically, if you’re helping someone sell or exchange digital assets — even if you never touch their funds — you’re now considered a broker.

This includes hosted wallet providers, decentralized payment processors, and even operators of digital asset kiosks. Whatever that even is. The Infrastructure Investment and Jobs Act of 2021 kicked this off, editing section 6045 to expand the definition of “broker.”

It also introduced reporting requirements for cryptos, putting them on par with traditional securities. While these changes officially took effect in January, the final rules for DeFi participants were delayed until now.

Gross proceeds reporting: What it means for DeFi

Also, under these regulations, brokers will have to report “gross proceeds” from crypto sales. This includes the total amount received by a seller, regardless of expenses like transaction fees.

For DeFi platforms that operate through smart contracts, this means creating systems to track and report every transaction. Because yes, even in a trustless ecosystem, someone will have to do the IRS’s bidding.

To enforce these rules, the IRS will use the same authority it applies to traditional brokers. Section 7805 of the tax code gives the Treasury Department the power to create regulations necessary for enforcing tax laws. And according to the IRS, tax compliance increases significantly when brokers are required to file information returns.

Public pushback and industry concerns

Of course, no one is happy about these changes. When the proposed rules were published in August, they brought in a flood of feedback. Over 44,000 comments poured in from industry leaders, crypto enthusiasts, and even average users worried about privacy and operational challenges.

One of the biggest issues was the IRS’s definition of a broker. Many believe that applying these rules to non-custodial platforms is both impractical and overreaching.

How can a smart contract report user data when it doesn’t even know who the user is? And what happens to the fundamental principles of DeFi—privacy, autonomy, and decentralization—if platforms are forced to comply with these regulations?

Despite the pushback though, the IRS still pushed forward. A public hearing happened in November 2023, followed by months of review. The final regulations were published in July 2024, and they addressed some concerns but left others unresolved.

But hey, we got a new administration coming in. At this point, anything done under President Joe Biden doesn’t even matter anymore. Because come January 20th, a self-proclaimed ‘crypto president’ will be taking over the White House.

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