The recent repeal of the IRS’s DeFi broker rule marks a significant win for crypto, but its long-term consequences remain uncertain. As the industry pushes for regulatory clarity, it must also prepare for the IRS’s next move.
The End of One Rule Marks the Beginning of Crypto’s Unresolved Tax Issues
The recent repeal of the Internal Revenue Service‘s (IRS) controversial decentralized finance (DeFi) broker rule is a significant win for crypto, but it does not mark the end of the industry’s tax woes.
The Road to Repeal
In December 2024, the IRS proposed a broad rule requiring DeFi platforms to follow standard crypto broker tax rules, including extensive user KYC and other disclosures. The crypto industry pushed back immediately, with numerous blockchain groups suing the IRS almost as soon as the rule was announced.
The decentralized finance (DeFi) sector is subject to evolving regulatory frameworks worldwide.
In the United States, the Securities and Exchange Commission (SEC) has issued guidelines on security token offerings, while the Commodity Futures Trading Commission (CFTC) oversees derivatives trading.
The European Union's Markets in Financial Instruments Directive (MiFID II) applies to DeFi activities within its jurisdiction.
Regulatory bodies are working to establish clear guidelines for DeFi platforms, balancing innovation with investor protection.
DeFi platforms aren’t designed to collect this type of information in the first place, and beyond that, the proposed rule contradicts DeFi’s core goal of protecting privacy while keeping transactions transparent.
Decentralized finance, also known as DeFi, is a financial system that operates on blockchain technology and enables peer-to-peer transactions without the need for intermediaries.
It provides decentralized lending, borrowing, and trading platforms, promoting financial inclusion and reducing transaction costs.
According to a report by Chainalysis, the DeFi market grew from $1 billion in 2020 to over $22 billion in 2022, with an average monthly growth rate of 30%.
The increasing adoption of DeFi is driven by its transparency, security, and efficiency.
A Temporary Reprieve
Fortunately, this rule is likely to be scrapped entirely under the Donald Trump administration after the U.S. Senate’s 70-28 vote against the ruling on March 26. This follows the US House‘s 292-132 vote on March 11 and the Senate’s earlier 70-27 vote on March 4, both in favor of repealing the IRS DeFi broker rule.
If the rule had stuck, it would have hurt the U.S. crypto industry and innovation beyond just DeFi. As the operator of crypto tax platform ‘Koinly’ , I know it would have made compliance significantly more costly and complicated for us too.
The Battle Is Far from Over
But it is far from over. This repeal was easy because the rule was so over-the-top that even most government officials saw it as unworkable. But what happens when the IRS returns with a more subtle, carefully crafted rule that again targets DeFi? Overturning this version doesn’t prevent the agency from trying again.
I wouldn’t be surprised if the IRS now goes on a hiring spree for DeFi experts to help with this, especially after bringing in several crypto specialists into the agency in February 2024.
The IRS’s Next Move
The IRS clearly believes it’s missing out on crypto tax revenue and is pushing to expand its reach as much as possible. DeFi may be privacy-focused, but it still involves money, so it’s not going to be ignored anytime soon.
The IRS won’t take this rule being rejected lightly either. It wouldn’t be a stretch to assume the agency will ramp up its audits even more on US crypto users to ensure their filings are accurate.
What’s Next for the Crypto Industry
The crypto industry has seen significant regulatory developments in recent years.
In the United States, the Securities and Exchange Commission (SEC) has increased scrutiny of Initial Coin Offerings (ICOs), while in Europe, the European Union's Markets in Financial Instruments Directive II (MiFID II) has been applied to cryptocurrency trading platforms.
These regulations aim to increase transparency and investor protection, but have also raised concerns about over-regulation and its impact on innovation.
So, what should the U.S. crypto industry do? It can’t afford to be reactive. Instead of waiting for the IRS to drop another harsh crypto tax ruling, it must push even harder for regulatory clarity on DeFi to prevent misinformed and overstepping rules from surfacing again.
The best time to push for fairer IRS tax rules is now. While crypto advocacy groups are already doing a great job on this, the industry needs to be even more persuasive — especially in pushing for rules that distinguish true brokers from self-executing smart contracts, ensure fair tax treatment for DeFi participants, and provide clear reporting guidance without stifling innovation.
With Trump in office and a more pro-crypto friendly environment in Washington, there is a chance to get regulations right before the pendulum swings back toward aggressive enforcement. That means there’s a four-year window to get this in shape.
A Warning from the Past
The IRS’s DeFi broker rule should serve as a warning: until there is a workable framework in place, regulators will continue attempting to impose harsh rules on a technology they barely understand.
And next time, the crypto industry might not be as lucky in gaining enough votes for a repeal.
