In a move that has ignited fierce controversy within the cryptocurrency industry, the Internal Revenue Service and U.S. Treasury Department finalized sweeping new tax reporting regulations on December 27 targeting decentralized finance platforms. The rules, which classify certain DeFi front-end providers as “brokers” subject to the same reporting requirements as traditional securities firms, drew immediate legal challenge and accusations of regulatory overreach from industry groups.
The Blockchain Association, DeFi Education Fund, and Texas Blockchain Council filed a lawsuit the same day the regulations were announced, arguing that the IRS has exceeded its statutory authority and violated constitutional protections. The legal challenge sets up what could become a defining regulatory battle as the cryptocurrency industry prepares for a potentially more favorable political environment under the incoming Trump administration.
What the New Rules Require
The final regulations implement tax reporting provisions from the Infrastructure Investment and Jobs Act, requiring certain digital asset service providers to collect customer information and report transactions to the IRS using the new Form 1099-DA—specifically designed for digital asset reporting.
Under the finalized rules, “front-end service providers” that interact directly with customers to facilitate digital asset transactions must now operate as brokers, collecting know-your-customer information and filing annual tax forms documenting gross proceeds from digital asset sales.
The Treasury Department estimates the regulations will affect 650 to 875 DeFi brokers serving approximately 2.6 million customers. These platforms would be required to begin reporting transactions occurring on or after January 1, 2027, with the first Form 1099-DA filings due in January 2028.
Importantly, the final rules do not classify protocol developers or operators of underlying blockchain infrastructure as brokers—a modification from earlier proposed versions that addresses some industry concerns about imposing reporting obligations on entities that lack customer relationships or transaction visibility.
“These regulations will help ensure that all taxpayers play by the same set of rules,” said Aviva Aron-Dine, Assistant Secretary for Tax Policy at the Treasury Department. The department maintains the rules don’t create new tax obligations but simply extend existing reporting requirements to digital asset transactions.
Industry Erupts Over “Midnight Rulemaking”
The cryptocurrency industry’s reaction was swift and overwhelmingly negative, with executives and legal experts condemning what they characterized as a last-minute regulatory assault by an outgoing administration hostile to crypto innovation.
“Today’s broker rulemaking is a disappointing, but expected, final attempt to send the American crypto industry offshore,” said Kristin Smith, CEO of the Blockchain Association. The organization, which represents major cryptocurrency firms, had urged Treasury to withdraw the proposed rules during the comment period.
Jake Chervinsky, chief legal officer at venture capital firm Variant, was even more blunt in his assessment. “This unlawful rule is the dying gasp of the anti-crypto army on its way out of power,” Chervinsky wrote on social media shortly after the announcement.
The timing has intensified industry frustration. Finalizing major regulatory changes just days before year-end—and mere weeks before a new administration takes office—struck many in the crypto community as deliberate political maneuvering rather than thoughtful policymaking.
Critics point to President-elect Donald Trump’s explicitly pro-crypto campaign promises, including commitments to make the United States “the crypto capital of the planet” and foster innovation-friendly regulation. By locking in restrictive rules now, the outgoing Biden administration potentially constrains the incoming administration’s regulatory flexibility.
Immediate Legal Challenge
Rather than waiting to see how the new administration might approach DeFi regulation, three prominent industry organizations filed suit in the U.S. District Court for the Northern District of Texas on December 27, the same day Treasury finalized the rules.
The lawsuit, brought by the Blockchain Association, DeFi Education Fund, and Texas Blockchain Council, challenges the regulations on multiple grounds:
Exceeding Statutory Authority: The complaint argues that the Infrastructure Investment and Jobs Act did not authorize the IRS to classify DeFi front-end providers as brokers, as they do not “effect” transactions in the way Congress intended when it used that term in securities law.
Administrative Procedure Act Violations: The plaintiffs contend the IRS failed to adequately consider public comments and substantive concerns raised during the rulemaking process, instead rushing to finalize regulations before the administration change.
Constitutional Concerns: The lawsuit raises constitutional issues, though specific arguments have not been publicly detailed. Industry attorneys have suggested potential Fourth Amendment privacy concerns and First Amendment issues related to compelled speech.
“The IRS and Treasury have gone beyond their statutory authority in expanding the definition of ‘broker’ to include providers of DeFi trading front-ends even though they do not effectuate transactions,” said Marisa Coppel, Head of Legal at the Blockchain Association.
The legal strategy reflects the industry’s determination to challenge regulations it views as fundamentally incompatible with decentralized technology architecture, rather than simply waiting for political remedies through the incoming administration.
The Technical Impossibility Problem
Beyond legal and political objections, DeFi advocates argue the regulations are technically unworkable given how decentralized protocols actually function.
Traditional brokers like Charles Schwab or E-TRADE maintain customer accounts, custody assets, and execute transactions on behalf of clients. This central role gives them comprehensive transaction visibility and customer information necessary for tax reporting.
DeFi protocols, by contrast, operate through smart contracts on public blockchains. Many front-end interfaces simply provide user-friendly ways to interact with these permissionless protocols but don’t custody assets, maintain accounts, or execute transactions themselves.
A user might access a decentralized exchange through a particular website today and a completely different interface tomorrow, or interact directly with smart contracts using command-line tools. The protocols themselves are often governed by decentralized communities rather than single corporate entities.
Critics of the new rules argue this creates an impossible compliance situation. How can a front-end provider collect know-your-customer information from users who can bypass that interface entirely? How can they report transactions they don’t execute and may not even observe in real-time?
The DeFi Education Fund labeled the regulations “unworkable, unconstitutional” in its immediate response to the finalization.
Treasury officials maintain the rules are narrowly tailored to front-end providers that do have customer relationships, leaving purely decentralized protocols untouched. However, this distinction may prove difficult to maintain in practice, as technology evolution continually blurs lines between centralized and decentralized architecture.
Political Context and Timing
The December 27 finalization cannot be separated from the broader political transformation underway in Washington. The cryptocurrency industry spent more than $130 million on the 2024 elections, achieving a 91% success rate for its favored candidates and fundamentally reshaping Congress’s approach to digital asset regulation.
Trump’s victory, combined with crypto-friendly gains in Senate and House races, has created expectations of dramatic policy shifts beginning in January. The incoming president has promised to establish a strategic Bitcoin reserve, eliminate capital gains taxes on crypto transactions, and replace SEC Chair Gary Gensler—long viewed as the industry’s chief regulatory antagonist.
Against this backdrop, the outgoing administration’s rush to finalize restrictive DeFi regulations reads to many industry observers as a deliberate attempt to entrench hostile policy before power changes hands.
However, even locked-in regulations may prove vulnerable. The Congressional Review Act allows Congress to overturn recently finalized rules with simple majority votes in both chambers. With crypto-friendly lawmakers controlling both the House and Senate in the next Congress, the DeFi broker rules could potentially be repealed through this fast-track mechanism.
Additionally, the new administration could decline to enforce the regulations, effectively rendering them moot even without formal repeal. Treasury and IRS leadership will change entirely, likely bringing officials more sympathetic to industry concerns about regulatory overreach.
The legal challenge also provides a potential path to blocking the rules before they take effect in 2027, though litigation typically moves slowly and outcomes remain uncertain.
Broader Regulatory Uncertainty
The DeFi broker controversy represents just one battle in a broader regulatory war that has defined cryptocurrency’s relationship with U.S. government agencies for years.
The SEC under Chair Gensler has pursued an aggressive enforcement-first approach, bringing dozens of cases against cryptocurrency companies for alleged securities violations while declining to provide clear rules of the road. The industry has characterized this as “regulation by enforcement,” arguing it creates impossible compliance situations where companies can’t know whether their activities are legal until after they’re sued.
Banking regulators have similarly adopted what industry groups view as hostile postures, with guidance that effectively discourages banks from providing services to cryptocurrency companies. This has forced many firms to operate with limited banking access or relocate operations overseas.
The IRS DeFi broker rules fit this pattern—aggressive interpretation of statutory authority to impose requirements that industry participants view as unworkable, announced at the last possible moment before a political transition.
What remains to be seen is whether the incoming administration can or will fundamentally reshape this regulatory landscape. Presidential transitions change leadership at agencies, but civil service staff and institutional cultures often persist. Regulations, once finalized, require formal processes to modify or repeal.
The cryptocurrency industry’s optimism about 2025 regulatory improvements is tempered by awareness that Washington typically moves slowly, even when political will exists for change.
International Competitive Implications
Beyond domestic regulatory concerns, the DeFi broker rules raise questions about U.S. competitiveness in emerging financial technology.
If compliance costs and legal risks make operating DeFi platforms from the United States prohibitively difficult, developers and companies will simply relocate to more hospitable jurisdictions. This “regulatory arbitrage” has already pushed significant cryptocurrency activity to countries like Switzerland, Singapore, and the United Arab Emirates.
The irony, as industry advocates point out, is that Americans will continue accessing DeFi protocols regardless of where they’re operated. Blockchain technology is inherently global and permissionless. Burdensome U.S. regulations don’t prevent Americans from using DeFi—they simply ensure those platforms are built elsewhere, denying the United States the jobs, tax revenue, and technological leadership that come with hosting innovation.
“The rule is an overreach that misunderstands DeFi technology and will stifle U.S. innovation while allowing foreign firms to serve American customers without the same regulatory burdens,” warned industry executives in a coalition letter calling for Congressional action to repeal the rules.
European regulators have taken different approaches with the Markets in Crypto-Assets Regulation (MiCA), which also entered key implementation phases in December 2024. MiCA establishes comprehensive regulatory frameworks for digital assets while attempting to accommodate technological realities of decentralized systems.
Whether the United States will ultimately converge toward similar balanced regulation or maintain its current enforcement-heavy approach remains one of the most consequential questions facing the global cryptocurrency industry.
What Happens Next
As 2024 draws to a close, the DeFi broker rules represent a significant source of uncertainty heading into what many expect to be a transformational year for cryptocurrency policy.
Several scenarios could play out over coming months:
Legal Victory: The lawsuit could succeed in blocking the regulations, either on grounds that the IRS exceeded its authority or through preliminary injunction preventing implementation while litigation proceeds.
Congressional Repeal: The new Congress could use the Congressional Review Act to overturn the rules in early 2025, sending a clear signal about legislative intent for digital asset regulation.
Administrative Reversal: The incoming administration could suspend enforcement, propose modifications, or initiate new rulemaking to replace the current approach with DeFi-friendly alternatives.
Compliance Reality: DeFi platforms could begin building compliance infrastructure despite disagreeing with the rules, calculating that fighting regulators is more costly than adapting operations.
Offshore Migration: U.S.-based DeFi developers could relocate operations to jurisdictions without similar reporting requirements, continuing to serve global users including Americans from abroad.
Most likely, elements of all these scenarios will unfold simultaneously. Some platforms will challenge the rules while others adapt; Congress may act while litigation proceeds; and the new administration will likely signal changed priorities even as formal regulatory changes take time to implement.
For now, the cryptocurrency industry closes 2024 with a mixture of optimism about the incoming administration and frustration that the outgoing government spent its final days imposing regulations the industry views as fundamentally misguided.
The battle over DeFi broker reporting rules has only just begun.
Information in this article reflects the state of cryptocurrency regulation as of December 29, 2024.
