The leading crypto lobbying group in the US has urged the IRS to reconsider its proposed tax rule that would redefine the term “broker” to include any entity that facilitates the transfer of digital assets. The group claims that this would effectively kill the decentralized finance (DeFi) industry in the country or force it to relocate abroad.
The proposed tax rule was announced by the US Treasury and the Internal Revenue Service (IRS) in late August as part of the $1 trillion infrastructure bill. The rule would broaden the definition of “broker” to apply to any person who, for consideration, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.
This would mean that any centralized crypto exchange or any DeFi protocol that enables users to exchange, lend, borrow, or stake digital assets would be subject to the same reporting and compliance obligations as traditional brokers of stocks and bonds. The rule would also require brokers to collect and verify the personal information of their customers, such as names, addresses, and tax identification numbers.
The Blockchain Association, which represents over 50 crypto companies and organizations, argues that this rule is unworkable and harmful for the DeFi sector. In a 33-page comment submitted to the IRS on Monday, the group explained that DeFi projects are designed to be trustless, permissionless, and decentralized, meaning that they do not have access to or control over the users’ funds or data.
The group also pointed out that DeFi users often interact with multiple protocols and smart contracts, which could be considered as brokers under the proposed rule. This would create a massive reporting burden for both the users and the protocols, as well as a serious privacy risk for the users, whose entire transaction history could be exposed to the public.
What are the implications of the proposed tax rule for the DeFi industry?
The Blockchain Association warns that the proposed tax rule would have devastating consequences for the DeFi industry in the US, which has grown exponentially in the past year. According to DeFi Pulse, the total value locked in DeFi protocols has increased from $14 billion in November 2022 to over $300 billion in November 2023.
The group claims that the proposed rule would either drive US-based DeFi projects out of existence or force them to move to more crypto-friendly jurisdictions. This would result in a loss of innovation, jobs, and tax revenue for the US, as well as a competitive disadvantage for the US in the global crypto space.
The group also warns that the proposed rule would undermine the core values and benefits of DeFi, such as financial inclusion, transparency, and efficiency. By requiring DeFi projects to centralize and collect user information, the rule would expose users to censorship, fraud, and hacking risks, as well as limit their access to diverse and innovative financial services.
What are the alternatives to the proposed tax rule?
The Blockchain Association urges the IRS to revise the proposed tax rule to exclude DeFi projects from the definition of broker. The group suggests that the IRS should adopt a more nuanced and tailored approach to tax regulation that recognizes the unique features and challenges of DeFi.
The group also recommends that the IRS should collaborate with the crypto industry and other stakeholders to develop clear and consistent guidance and standards for DeFi taxation. The group believes that this would foster a more constructive and cooperative relationship between the regulators and the innovators, as well as promote compliance and transparency in the DeFi sector.
The proposed tax rule is currently open for public comment until November 15, 2023. The IRS held a public hearing on the rule on Monday, where it received feedback from various crypto experts and representatives, including the Blockchain Association. The IRS will then decide whether to adopt, modify, or withdraw the rule.
