Recent developments in Treasury’s crypto broker reporting regulations have ignited heated debate across the digital asset community. At the heart of the controversy lies a significant overreach: Treasury’s expanded definition of “broker” now includes entities like informational websites, platforms with "connect wallet" features, and other services that merely provide users with data they can use to transact on blockchain networks. This interpretation, codified in TD 10021, has drawn sharp criticism for its legal overextension and potential to stifle innovation in the burgeoning crypto sector.

The Legal Framework

Under Section 6045 of the tax code, brokers are required to report sales of securities and other assets on Form 1099. The Infrastructure Investment and Jobs Act amended this section to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Treasury’s interpretation of this language, however, appears to stretch beyond the intended scope.

The legislative history explicitly cautioned Treasury against a broad reading of these amendments. In 2022, Treasury assured Congress that any regulations would align with established principles for securities broker reporting. Despite these assurances, the final rule effectively treats platforms that enable users to interact with blockchain networks as brokers—even if those platforms merely provide information or tools for users to execute their own transactions.

Why Treasury’s Interpretation Fails

Treasury’s position blurs the critical distinction between traditional brokers, who custody assets and facilitate transactions, and entities that simply provide users with information. Informational platforms, like websites or even AI tools such as ChatGPT, do not control or effectuate transactions; they merely equip users with data to interact directly with blockchain validators. This distinction matters not only for compliance but also for the integrity of the regulatory framework.

Moreover, Treasury’s reliance on technical details—such as whether a platform includes a “connect wallet” button—as a dividing line between brokers and non-brokers is arbitrary and unsupported by Congressional intent. There is no indication that lawmakers envisioned regulatory obligations hinging on such superficial features.

Industry Context and Critiques

The IRS’s recent clarification of how broker rules apply to decentralized finance (DeFi) has introduced additional complexity. The regulations identify three layers within the DeFi ecosystem: the interface layer, application layer, and settlement layer. The IRS has determined that only the interface layer—comprising front-end trading services—will be classified as brokers. These front-end services, which include websites and browser extensions that facilitate user interactions with DeFi protocols, are now required to collect Know Your Customer (KYC) information, track transactions, and report gross proceeds to the IRS using Form 1099-DA starting in 2027.

Some practitioners view this approach as a pragmatic solution to address tax compliance gaps, particularly given the growth of DeFi and the potential for misuse as a tax shelter. They argue that increased transparency aligns with global regulatory trends, such as the EU’s MiCA framework and OECD’s Crypto-Asset Reporting Framework (CARF), which emphasize accountability and disclosure.

However, critics highlight that these rules could expose users’ personally identifiable information (PII) and create compliance challenges for platforms ill-suited to meet such obligations. Unlike centralized finance (CeFi) exchanges, which act as custodians and intermediaries, DeFi platforms often lack direct control over user transactions. Critics argue that forcing these entities into a broker role disrupts the decentralized nature of the ecosystem and exceeds the statutory authority granted by Congress.

Practical and Industry Implications

The implications of these regulations are far-reaching. For DeFi platforms, compliance could involve significant operational changes, such as implementing KYC protocols and tracking user activity. This may deter innovation, push smaller players out of the market, or incentivize relocation to jurisdictions with more favorable regulatory environments. Users, meanwhile, face increased scrutiny and the burden of reconciling incomplete tax forms that omit cost basis information, potentially complicating accurate tax reporting.

From a legal perspective, questions remain about the enforceability of these rules. How can Treasury monitor compliance effectively when DeFi platforms often operate globally and without centralized control? Additionally, the classification of front-end services as brokers raises concerns about arbitrary distinctions within the DeFi stack, such as the presence of “connect wallet” features, which may not meaningfully impact a platform’s role in facilitating transactions.

A Balanced Path Forward

While some may view Treasury’s actions as a necessary step to bring greater transparency and accountability to the crypto space, it is essential to recognize the limits of administrative authority. Sweeping changes of this nature should originate from Congressional action, ensuring robust debate and consideration of industry input.

The DeFi sector requires a regulatory framework that balances transparency with innovation, preserving the decentralized principles that underpin the ecosystem while addressing legitimate policy concerns. At Anderson P.C., we are committed to helping clients navigate these evolving challenges. If your business is impacted by these new reporting rules or other legal developments in the digital asset space, reach out to us for strategic counsel tailored to your needs.

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