Below, Manimama`s team explores what the rule entailed, why it sparked controversy, and the implications of its repeal.
What is the IRS Rule ?
IRS rule aimed to tighten tax oversight of cryptocurrency transactions by expanding reporting requirements. It broadened the definition of a “broker” to include not only centralized exchanges but also participants in the DeFi ecosystem, such as front-end service providers running websites that interface with decentralized protocols. These entities were required to:
- Collect and report detailed user trading data, including names, addresses, and taxpayer identification numbers.
- Issue Form 1099 tax returns to customers, documenting non-employment income like capital gains from crypto trades—similar to reporting for gambling winnings or royalties.
- Track transactions with no minimum threshold, meaning even small trades fell under scrutiny.
Why the IRC Rule Became Controversial?
The rule ignited fierce backlash from the crypto community for several reasons:
- Technical Impossibility: DeFi protocols, by design, lack centralized control and custody over user data. Requiring them to collect personal information and link on-chain addresses to real-world identities was seen as unfeasible, clashing with the ethos of permissionless systems.
- Compliance Burden: Critics argued that the rule imposed “impossible compliance burdens” on DeFi participants, forcing them to register as traditional financial brokers—an ill-fitting framework for decentralized technology. This threatened to stifle innovation and push U.S.-based firms overseas.
- Privacy Concerns: Mandating extensive data collection undermined the privacy that many crypto users value.
- Competitive Disadvantage: Industry voices labeled it a “midnight regulation” that placed “unprecedented regulatory burdens” on American companies, risking their global competitiveness against less-regulated jurisdictions.
Repeal of IRS Rule and Its Implications
According to the Senate’s repeal on March 4, 2025, the rule will be nullified, relieving DeFi platforms and other “brokers” of additional reporting duties. Now the last step is expected – a signature from President Trump.
However, this repeal does not mean that cryptocurrency transactions are exempt from taxation. Taxpayers are still obliged:
- Report income from cryptocurrency activities (e.g., mining, staking, or selling) in their tax returns.
- Answer questions about digital asset transactions, as the IRS continues to treat cryptocurrency as property.
The repeal only applies to additional reporting requirements for brokers, leaving untouched broader IRS monitoring tools such as Form 1099s from exchanges, partnerships with blockchain analytics firms such as Chainalysis, and subpoenas.
As Kristin Smith noted, this repeal marks a “turning point” for DeFi and crypto at large, hinting at a more innovation-friendly regulatory landscape ahead.
Beyond these, the repeal could reshape the U.S. crypto landscape.
For one, it removes a key barrier to entry for DeFi startups, potentially spurring a wave of new projects and investment as entrepreneurs no longer face the daunting prospect of retrofitting decentralized systems for centralized reporting. This could accelerate the development of cutting-edge protocols, positioning the U.S. as a leader in blockchain innovation rather than a laggard behind jurisdictions like Singapore or the UAE.
Additionally, the absence of mandatory data collection by DeFi platforms preserves user privacy, reinforcing trust in these systems.
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