Reported by JAMES M. GATHECHA

The U.S. Treasury Department and the Internal Revenue Service (IRS) have unveiled a tax reporting framework that will affect the fast-growing decentralized finance (DeFi) sector. This new regulatory framework introduces several key provisions designed to ensure compliance and capture tax revenue from the rapidly expanding industry, including a requirement for DeFi protocols to implement Know-Your-Customer (KYC) procedures.

Enhanced Reporting Requirements

According to the framework published on Dec. 27, the Interface layer of DeFi platforms, which constitutes the primary user interaction through websites and applications, has been classified as brokers by the IRS due to their direct engagement with users. Consequently, decentralized exchanges (DEX) like Uniswap and wallet extensions are now required to comply with traditional broker regulations. 

This classification means that while the Application and Settlement layers remain exempt from these requirements, frontend platforms must ensure compliance, specifically by implementing KYC protocols to verify user identities. Ideally, DeFi protocols, per the current operational model, are noncustodial. In addition to the name and transaction details, market experts believe the new reporting standard might require protocols to include addresses and other sensitive details.

Once the new compliance measures are in place, the IRS will mandate that DeFi brokers issue Form 1099 to their users for tax reporting purposes. Digital asset brokers must comply with new regulations starting January 1, 2025, while DeFi brokers have until January 1, 2027, to meet these requirements, acknowledging their current lack of sufficient systems for managing user data. Additionally, real estate professionals using digital assets for transactions or closings after January 1, 2026, will face new reporting obligations, emphasizing the increasing integration of digital assets in traditional industries like real estate.

Under the regulations, DeFi brokers are required to report on all digital assets, including Non-Fungible Tokens (NFTs) and stablecoins. 

Read full report: https://www.crypto-news-flash.com/irs-and-treasury-finalize-defi-broker-regulations-market-experts-decry-overreach/