- IRS rules require brokers to report crypto profits and customer data.
- Deaton warns the regulations conflict with DeFi’s core principles and could drive projects offshore.
- The rules, effective January 2027, aim to align DeFi brokers with securities reporting standards.
The Biden administration’s newly finalized crypto tax regulation, titled Gross Proceeds Reporting by Brokers that Regularly Provide Services Effectuating Digital Asset Sales, has faced objection. John Deaton, XRP lawyer, has raised issues about the new rule’s possible effect on decentralized finance. The rule, presented by the Internal Revenue Service (IRS), needs brokers to report profits and provide customers with Form 1099, including user data such as names and addresses.
Concerns Over Impact on Decentralized Finance
Deaton expressed that the regulations unfairly target DeFi platforms. He stated through X Space that permissionless smart contracts cannot comply with these requirements, as they operate autonomously without centralized control or intermediaries.
He remarked that enforcing such obligations on DeFi could stifle innovation and drive projects offshore, away from the United States. Deaton also compared the regulation to previous legislative efforts by Senator Elizabeth Warren, which he claimed aimed to restrict self-custody for Bitcoin users.
Obligations for Brokers and Front-End Service Providers
The new rule imposes broker-like responsibilities on front-end service providers interacting with users and providing decentralized protocol access. However, the regulation excludes the DeFi protocols themselves from these obligations.
Critics argue that this distinction creates significant operational challenges for entities facilitating DeFi interactions. Deaton added that the rules conflict with the core principles of DeFi, such as decentralization and user privacy.
Broader Implications and Crypto Industry Reactions
Deaton criticized Senator Elizabeth Warren’s ongoing stance against cryptocurrencies and her alignment with traditional banking. He indicated that such regulatory frameworks could hinder domestic growth in the digital asset industry. Additionally, Deaton pointed out that the finalized rules might be designed to counteract a potential pro-crypto administration in the future.
The regulations are set to take effect on January 1, 2027, allowing the industry time to adjust. The IRS has clarified that the aim is to align DeFi brokers with the reporting standards of traditional securities brokers. Deaton called on Congress to consider reversing these rules to protect DeFi innovation.
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