House votes to repeal crypto DeFi tax regulation

The House of Representatives passed a resolution to repeal the regulations that created reporting requirements for trading front-end service providers that work directly with users on digital asset transactions (colloquially known as DeFi brokers.) The 292-132 vote came shortly after the Senate approved its own bill on the matter by a vote of 70-27. 

DeFi systems, unlike traditional finance, do not use intermediaries like banks but instead operate in a peer-to-peer fashion using smart contracts, which are self-executing lines of computer code that automatically enforce the rules and conditions of an agreement between two or more parties, stored on a blockchain, a type of public digital ledger. The previous administration warned that illicit actors can launder their money through the DeFi ecosystem in a number of ways, such as using cross-chain bridges to transfer cryptocurrency from one blockchain to another, asset mixers that comingle the proceeds of criminal activities with legitimate money, or liquidity pools that provide fee income. The Treasury said that ransomware gangs in particular are fond of laundering their money through DeFi networks.

In general, the rule required decentralized finance platforms to report detailed information on customers to the IRS, starting in tax year 2027. Effectively, the rule would require DeFi brokers to file a Form 1099 and be subject to the same reporting rules as brokers for securities and operators of custodial digital asset trading platforms. The rule was designed to improve tax compliance and create parity with centralized crypto exchanges and stock brokerages. Those opposing the rule, though, said there were too many differences between DeFi brokers and traditional securities brokers for the rule to be practical — they are not centralized, do not collect the information needed to implement this rule, and do not act as a true third-party intermediary like more traditional securities brokers. They warned that the rule would hold major negative consequences for the crypto sector. 

On Dec. 27, 2024 the Treasury and the IRS issued final regulations on sales and exchanges of digital assets on the new Form 1099-DA for decentralized finance brokers, along with transition relief. The requirements for DeFi companies start on or after Jan. 1, 2027, two years later than the rules for centralized exchanges and platforms.

Lawmakers, mostly Republicans, objected not only to the rule itself but also to its 11th hour issuance. 

"Under President Biden, the IRS traded congressional intent for a politically motivated mandate," said House Ways and Means Committee chairman Jason Smith, R-Missouri, in a statement. "The Biden administration made no secret of its opposition to digital assets and America's leadership in this booming industry. Bureaucrats weaponized every tool in the toolbox, including finalizing this rule at the 11th hour, crippling the digital asset industry and threatening American leadership and innovation in the process. Approximately one in four Americans own cryptocurrency. This rule puts a huge burden on these regular folks and could discourage participation in the digital asset market altogether."  

The joint resolution effectively repeals the rule submitted by the Treasury relating to "Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital Asset Sales." It also paves the way for the current administration to apply its own rules. 

The news comes after another major crypto-related announcement: the establishment of a Strategic Bitcoin Reserve and a U.S. Digital Asset Stockpile. The reserve will treat Bitcoin, the first and most popular blockchain-based cryptocurrency, as a reserve asset. It will be capitalized with tokens owned by the Department of Treasury that were forfeited as part of criminal or civil asset forfeiture proceedings.

The U.S. Digital Asset Stockpile, meanwhile, will consist of digital assets other than bitcoin owned by the Department of Treasury that were forfeited in criminal or civil asset forfeiture proceedings.