Defi faces 3 options if IRS rule remains in effect

The recent Internal Revenue Service (IRS) rule designating decentralised finance (DeFi) front-ends as brokerages has sparked significant concern within the crypto industry.

Alex Thorn, the head of research at Galaxy Digital, discussed three possible approaches for DeFi if the IRS rule is not reversed.

Thorn explained that DeFi services and applications could either comply with the IRS reporting requirements and accept the designation as a brokerage, block users from the United States, or abandon smart contract upgrades and revenue generation.

“DeFi applications with no front-end website, non-upgradeable contracts, and that receive no ‘consideration’ from the disposition of digital assets —i.e., collect no fees — could be exempt from being designated ‘brokers’ under the proposal,” he added.

In other words, Thorn noted that highly decentralised applications would not be in a position to know and comply with broker reporting requirements.

The IRS issued the final rule on December 27, 2024. According to the agency, "Trading front-end service providers" will be classified as brokerages, a definition that includes decentralised exchanges.

If implemented, the rule would take effect in 2027.

The rule has faced intense opposition from crypto industry groups and executives.

Advocacy groups have criticised the rule, with many calling it an overreach by the government.

Bill Hughes, an attorney for ConsenSys, pointed out the timing of the rule's release, claiming it was deliberately dropped during the holiday stretch to avoid attention.

A lawsuit was filed against the IRS on December 27 by the Texas Blockchain Council, the Blockchain Association, and the DeFi Education Fund, arguing that the rule constitutes unconstitutional overreach.

“This case is about unlawful and unconstitutional overreach by the Department of the Treasury and the Internal Revenue Service,” the lawsuit states.