You Can Protect DeFi | Bankless

Guest Authors: Miller Whitehouse-Levine & Jason Schwartz

Bankless Nation, the IRS wants to treat everyone in crypto as a broker.

Like, everyone.

Under newly proposed U.S. Treasury rules, potentially effective 2025, people providing certain DeFi websites, NFT marketplaces, crypto wallets, or other services “facilitating” crypto sales would have to make a decision: centralize, shut down, or block all U.S. users (and possibly VPNs).

You can help by sending a message to the IRS before the commenting period closes soon! (more on this further below)

How Did We Get Here? 📜

In 2021, as part of the Infrastructure Investment and Jobs Act (IIJA), Congress clarified the definition of “broker” to include businesses “responsible for regularly providing any service effectuating transfers of digital assets” for others. The proposed Treasury rules interpret (1) “digital assets” and (2) “services effectuating transfers.”

You might remember that at the time, an agreement was reached among Senate Democrats, Republicans, and Biden White House officials to ensure the IIJA amendment would not capture people who are not actually brokers. Unfortunately, unrelated procedural issues kept that agreement out of the bill before its enactment, and Treasury now has unfortunately decided to interpret the definition of “broker” beyond anyone’s worst fears.

Unpacking the Proposed Regs 📦

Digital asset. Everything tokenized would be a “digital asset” falling within the new rules. It wouldn’t just be cryptocurrencies, as NFTs and stablecoins would be subject to 1099 reporting, too.

Pokémon offchain? No 1099 😎
Pokémon onchain? 1099 💀
Coffee with fiat? No 1099 😎
Coffee with USDC? 1099 💀

Broker. Even worse, the proposed rules define a broker to include any business that “facilitates” token sales if the business could collect and report information to the IRS.

That means crypto websites like Uniswap.org and OpenSea.io, and crypto wallet providers like MetaMask, would be considered brokers because they “facilitate” token sales and could geoblock people who don’t provide their personal information. 🤯

In addition, because the proposed rules deem persons who can set their own fees to be able to collect information, they appear to capture many market participants who can’t possibly comply, like RPC nodes, block builders, layer-two sequencers, smart contract developers, governance token-holders, and liquidity providers. Even validators may be treated as brokers if they provide any “functions or services” besides validating (like, say, plugging into RocketPool or Eigen Layer).

All so-called brokers in the tech stack would have a Form 1099 filing obligation, even if that creates duplicative reporting.

Wen doom? 🗓️

The proposed regs would take effect in two phases:

2025: Reporting begins for gross proceeds of sales
2026: Reporting expands to include a user’s tax basis

For every transaction, each broker would have to file a 1099 with the IRS and deliver a copy to the user. The 1099 would include the user’s name, address, SSN, and public blockchain address, the transaction ID, and the consideration received in the transaction.

What’s next? ⏰

The proposed rules trigger a 60-day comment period, meaning all comments are due to the IRS by October 30. UPDATE: now, November 13!

The IRS has to consider all comments, but isn’t required to implement them.

It can then finalize the regulations. Although the rules would likely face legal challenges if finalized in their current form, those challenges can take a long time.

Our Course of Action 🛡️

The DeFi Education Fund is drafting a comprehensive comment letter highlighting the proposed rules’ statutory overreach, their unconstitutionality, their potential to increase taxpayer confusion and stifle innovation, the strain they would put on government resources, their creation of information honeypots ripe for exploitation, and their unaccounted for costs.

You can help! And we need your help! 🙏

The IRS is required to consider all comments it receives, and the consequences for crypto-users are acute. Let’s make sure every voice is heard. Visit our call-to-action website and submit your own comment letter to the IRS before October 30, calling on them to withdraw this misguided and unconstitutional rulemaking.

In Conclusion 🌪️

These proposed rules pose an existential threat to the use of crypto in America. If they are finalized in their current form, it is likely that the most used “front ends” and wallet providers will simply cut off U.S. users. The situation is dire. Now is not the time for complacency.

Let’s rally, mobilize, and respond!