U.S. lawmakers challenge IRS tax rule on DeFi projects

The US House of Representatives has now proposed a bill that would bar the IRS from regulating taxes in decentralized finance or DeFi platforms. The bill was moved to the House floor by the House Ways and Means Committee through a 26-16 split, and now, the Republicans, who currently dominate the House, are in support of cryptocurrencies.

The resolution targeted an IRS regulation that was passed in December, in which DeFi projects should be classified as brokers. As per the rule, DeFi platforms are required to provide the same reportage standards as brokers involved in equities or debt securities trading.

This includes the provision of Form 1099 tax documents to users. The US Treasury Department has stated that the form may assist with reducing errors and improving compliance.

House Ways and Means Committee Chair Jason Smith (R-Mo.) claims that the measure burdens DeFi projects unnecessarily while excluding foreign persons. According to Smith, the regulation protects international competitors by setting extremely high standards for U.S. projects only.

However, some of the major crypto firms and lobbying groups, such as the Blockchain Association, have opposed the rule. Last week, they sent a letter to Congress asking the congressmen to rescind the regulation. Critics of the rule have also expressed similar opinions, stating that the rule will hamper innovation and put undue pressure on DeFi platforms.

Rep. Mike Carey went further by stating that the regulation would overburden both taxpayers and the IRS. Republican Rep. Jason Smith, who is the chairman of the committee, accused the federal government of overreaching existing tax laws.

Democratic lawmakers, however, have defended the rule as essential, mainly regarding tax compliance. Rep. Richard Neal defended the regulation, stating that it is against tax avoidance and that the law requires everyone to pay what is due. If this rule is repealed, revenue loss would aggregate to $3.9 billion within a decade in the United States alone.

Broader crypto industry response

The resolution corresponds to initiatives in the Senate, where Sen. Ted Cruz (R-TX) presented a similar measure in January. Cruz also expressed his disapproval of the IRS rule by arguing that blockchain technology faces risks of stagnation in the United States.

However, the resolution cannot take effect without approval by both chambers of Congress and the president, which is a provision of the Congressional Review Act. If adopted, the measure will repeal the IRS rule, meaning that DeFi projects will no longer be subject to tax reporting.

The IRS has recently made clear the taxation on staking rewards for cryptocurrencies by stating that they are subject to tax when received.

Cryptopolitan Academy: Coming Soon - A New Way to Earn Passive Income with DeFi in 2025. Learn More