The Future of DeFi Tax Reporting: Will the New Rules Survive?
By Brooks Bailey; Photo Credit: Mehaniq/Shutterstock
On December 27, 2024, the United States Department of the Treasury and Internal Revenue Service (IRS) released final regulations regarding cryptocurrency reporting requirements.[1] The regulations target decentralized finance platforms, requiring that specified “front-end” platforms report digital asset transactions to the government via new Form 1099-DA. The rules do not change the tax treatment of cryptocurrency, but instead focus on bringing decentralized finance platforms under reporting requirements applicable to brokers for securities, among others.
Decentralized platforms, also known as peer-to-peer networks, facilitate transactions among parties without taking custody of the transferred assets, as traditional brokers do.[2] Centralized platforms must begin reporting digital asset sales on transactions occurring in 2025 on Form 1099-DA. While decentralized platforms must begin reporting transactions occurring in 2027, the question is whether such requirements will survive.
The same day the final rule was released, Blockchain Association and others brought suit challenging the rule on multiple grounds, alleging it was an “unconstitutional overreach.”[3] Further, in line with the new administration’s pro-crypto priorities, Republicans Ted Cruz and Mike Carey are pushing an effort to strike down the increased reporting rules. Cruz argues the “regulation undermines the purpose of DeFi technology: to enable individuals to freely buy, sell, and exchange digital assets.”[4] Carey suggests the regulation “represented clear overreach from the IRS” and “will result in a tidal wave of new digital asset returns, overwhelming IRS resources.”[5]
This Congressional challenge has been brought under the Congressional Review Act; wherein the joint resolution of disapproval will require a simple majority by both the House and Senate and ultimately a signature by the President.[6] While Republican ownership of a unified majority may suggest optimism for the industry, it is critical to note actions under the Congressional Review Act have been overwhelmingly unsuccessful. Notably, the 118th Congress introduced over 200 joint resolutions of disapproval, but was not able to successfully overturn a single rule.[7]
The final regulations were premised upon increasing transparency and treating decentralized finance platforms more akin to stock brokerages. As cryptocurrency becomes more widespread, regulators fear the privacy inherent in blockchain transactions enables tax evasion. For example, estimates suggest only 30% to 40% of individuals report cryptocurrency gains.[8] Thus, the regulations stem from the 2021 Infrastructure Investment and Jobs Act, wherein the provision was estimated to raise nearly $28 billion over 10 years.[9]
However, cryptocurrency industry leaders accuse the reporting requirements of stifling innovation. Because decentralized finance platforms are merely software, exchanges generally do not track trading information or have employees. While experts fear this timeline is too expedited, transitional relief from reporting penalties is provided where the platform makes a good faith effort to comply. Nonetheless, the industry has become increasingly involved in lobbying and political donations.
The Trump administration made its pro-crypto stance clear, promising to establish a “strategic national bitcoin reserve.”[10] Within his first few days in office, President Trump signed an executive order to support the crypto industry, specifically repealing a Biden executive order that sought “to promote high standards for transparency, privacy, and security—including through regulatory, governance.”[11]
While the decentralized finance reporting requirements are still set to commence for transactions occurring on or after January 1, 2027, the digital asset landscape will change tremendously before then. Notably, on January 21, 2024, the SEC announced the formation of a task force tasked focused on developing “a comprehensive and clear regulatory framework” for crypto.[12] Ultimately, the debate surrounding decentralized finance reporting represents coming changes. However, it will be interesting to see how the taxation of digital assets evolves as scholars and politicians debate their conceptual nature.
Brooks Bailey is currently a 2L at Vanderbilt Law School. Originally from Kansas City, he graduated from The University of Alabama with a Master’s of Tax Accounting.
[1] Gross Proceeds Reporting by Brokers that Regularly Provide Services Effectuating Digital Asset Sales, 89 Fed. Reg. 106928 (Dec. 27, 2024) (to be codified at I.R.C. § 6045).
[2] Jason Scharfman, Cryptocurrency Compliance and Operations 171 (2022) (noting further that decentralized systems remove traditional financial barriers such as “extensive compliance pre-qualification paperwork [and] identity verification requirements”).
[3] Blockchain Ass’n v. Internal Revenue Serv., No. 3:24-cv-03259-X (N.D. Tex. Dec. 27, 2024) (complaint).
[4] Press Release, Senator Tom Cruz, Sen. Cruz, Rep. Carey, Colleagues Work to Overturn Biden Admin IRS Rule Sending American Cryptocurrency Innovation Overseas (Jan. 22, 2025).
[5] Id.
[6] S.J. Res. 3, 118th Cong. (2025); H.R.J. Res. 25, 118th Cong. (2025).
[7] Congressional Review Act, Overview and Tracking, Nat’l Conf. State Legislatures, https://www.ncsl.org/state-federal/congressional-review-act-overview-and-tracking, (Jan. 28, 2025).
[8] Richard Rubin, Republicans Want to Kill Tax-Reporting Rule for Some Crypto Trades, Wall St. J. (Jan. 31, 2025), https://www.wsj.com/finance/currencies/crypto-taxes-defi-irs-republicans-repeal-11c39f66.
[9] Gross Proceeds Reporting, supra note 1.
[10] Lydia Kibet, How Trump’s ‘Strategic Bitcoin Reserve’ Could Affect the Economy in 2025, Yahoo Fin. (Feb. 13, 2025), https://finance.yahoo.com/news/trump-strategic-bitcoin-could-affect-110035699.html.
[11] Exec. Order No. 14607, 87 Fed. Reg. 14143 (Mar. 9, 2022).
[12] Press Release, U.S. Sec. and Exch. Comm’n, SEC Crypto 2.0: Acting Chairman Uyeda Announces Formation of New Crypto Task Force (Jan. 21, 2025).