On December 27, 2024, Treasury and the IRS issued final regulations (the “Final Regulations”) on reporting requirements for participants in decentralized finance (“DeFi”), accompanied by a press release and Notice 2025-3, which provides transitional relief. .
The Final Rules update the Proposed Rules (the “Proposed Rules”) published on August 29, 2023, which we discussed here, and follow a separate set of Final Rules relating to custodian brokers published on July 9, 2024, which we discussed here. we discussed here. Key aspects of the final rule are discussed below.
- The draft regulations introduced reporting requirements for a new category of brokers called “digital asset intermediaries”. Compared to the Proposed Regulations, the Final Regulations narrow the scope of digital asset intermediaries to those offering “trading front-end services” or certain other “execution services”, thereby targeting non-custodial broker-dealers, including DeFi exchanges, such as Uniswap and Instaswap. . The preamble to the final rule suggests that Internet service providers, Internet browsers, and computer and smartphone manufacturers do not fall under the definition of broker.
- The final rule includes exceptions for validation services and certain wallet services.
- The final regulations do not exempt DeFi participants from backup withholding obligations.
- Notice 2025-3 provides transitional relief from broker reporting penalties and backup withholding.
- The final regulations apply to sales of digital assets made on or after January 1, 2027.
The final regulations were highly anticipated after being delayed by the Treasury and the IRS, who determined that further review of the questions and comments received on the proposed regulations regarding DeFi were warranted. Among the more than 44,000 comments received, which we discussed here, many, like this one here, criticized the breadth of the proposed regulation, arguing that it would take too much control of the DeFi industry. Despite their narrower scope, the final regulations are highly contested, as evidenced by a lawsuit filed on December 27, 2024 by three DeFi groups, arguing that the final regulations violate the Administrative Procedure Act and are unconstitutional. This complaint highlights the growing tension between the DeFi industry and the IRS. Rest assured, we will continue to keep you informed of key developments as they evolve.
