Crypto Groups Sue IRS Over New DeFi Reporting Rules

Three major crypto industry groups — DeFi Education Fund, Blockchain Association, and Texas Blockchain Council — have filed a lawsuit against the U.S. Internal Revenue Service (IRS) over new tax regulations. These rules could change how decentralized finance (DeFi) platforms handle customer information.

Background on the IRS Rule

The IRS is finalizing crypto tax regulations as part of the Biden Administration’s Infrastructure Investment and Jobs Act. These regulations require DeFi platforms to report customer data like centralized exchanges do. The IRS argues that this will help close the “information gap” on digital assets, ensuring proper tax compliance.

However, these groups argue that this approach misrepresents how decentralized systems operate. They claim that DeFi trading front-ends, which give users access to crypto protocols but don’t execute transactions themselves, shouldn’t be classified as brokers.

Why Crypto Industry Groups Are Opposing the Rule

The groups argue that these new rules:

Violate privacy: The rules infringe on the privacy of individuals using decentralized technology.
Harm DeFi platforms: These regulations will create significant challenges for decentralized platforms and may force them to move offshore.
Mislabel platforms: DeFi platforms, which don’t have brokers involved in transactions, should not be considered brokers.

Marisa Coppel, head of legal at the Blockchain Association, says the new regulations could harm the DeFi ecosystem and privacy rights. If enforced, they could push many DeFi platforms outside the U.S., where the regulatory environment is more favorable.

The Legal Challenge and Its Impact

The lawsuit filed by these industry groups challenges the IRS’s interpretation of DeFi platforms as brokers. According to the lawsuit, decentralized platforms are not broker-like because they don’t handle transactions themselves.

The outcome of this case will set a precedent for how DeFi systems are regulated in the U.S. If the rules are enforced, it could discourage innovation in the U.S. crypto sector, pushing key players to relocate to other countries.

Additionally, it could affect individual privacy, which is a core value of many blockchain and cryptocurrency users.

What Happens Next?

The legal battle could determine the future of DeFi platforms in the U.S. The IRS is under pressure to reconsider these rules. If the lawsuit succeeds, it could reshape how crypto taxes are handled and impact the global DeFi ecosystem.