tl;dr
The US Department of the Treasury and the Internal Revenue Service (IRS) have finalized broker rules for digital assets, requiring DeFi protocols to conduct Know-Your-Customer (KYC) procedures. The regulations also mandate reporting of user activity and tax, with DeFi front-ends required to comply b...
The US Department of the Treasury and the Internal Revenue Service (IRS) have finalized broker rules for digital assets, mandating Know-Your-Customer (KYC) procedures for DeFi protocols. Compliance for DeFi front-ends is required by Jan. 1, 2027, prompting industry criticism and potential legal challenges against the regulations.
Industry experts have voiced disapproval, citing the rules as unlawful and beyond the Treasury's regulatory scope. Brokers are obligated to report user activity, sales, exchanges, and user tax, with DeFi front-ends needing to implement KYC processes. The differing timelines for compliance stem from insufficient systems for data management and reporting.
Reporting requirements encompass all digital asset trades, including non-fungible tokens (NFTs) and stablecoins, despite industry advocates calling for narrower definitions. Transition periods afford relief from reporting penalties and backup withholding, with limited relief applicable to certain transactions. Real estate professionals using digital assets for closings will face additional reporting obligations from Jan. 1, 2026.
Exclusions from immediate reporting include wrapping and unwrapping, liquidity provider, staking, and lending-related transactions. However, future guidance is expected to address these aspects within the DeFi ecosystem. The rules have incited backlash, with legal challenges anticipated, and experts projecting Congressional review and potential disapproval.
These developments signal a contentious landscape within the digital asset industry, reverberating with potential implications for regulatory oversight and industry compliance.