Key Points:

• The Blockchain Association and others are suing the IRS over a rule requiring DeFi platforms to report user data by 2027.
• Critics argue the regulation threatens individual privacy and could drive the DeFi industry offshore.
• The rule, stemming from a 2021 law, seeks to close tax compliance gaps related to digital assets.

DeFi Advocacy Groups Sue IRS Over Reporting Mandate

The Blockchain Association, the DeFi Education Fund, and the Texas Blockchain Council have filed a lawsuit against the IRS to challenge a recently finalized rule requiring certain decentralized finance (DeFi) platforms to collect and report users’ personal information and transaction history starting in 2027.

What’s the Controversy?

The new IRS rule applies to “DeFi brokers,” mandating that they:

• Store sensitive user data, including names and addresses.
• Report users’ trading activities to the IRS.

Critics claim this requirement imposes an unreasonable burden on DeFi protocols, which lack traditional intermediaries like brokers.

“This is not only a violation of individual privacy rights but also risks pushing this entire, burgeoning technology offshore,” said Marisa Coppel, the Blockchain Association’s general counsel.

Why DeFi Advocates Say the Rule Won’t Work

Unlike traditional finance, DeFi operates without intermediaries. Users transact directly using software, maintaining full control of their digital assets.

• The lawsuit argues that DeFi protocols, by design, cannot comply with broker-reporting rules.
• Enforcing the rule would represent a regulatory overreach, potentially stifling the industry.

“This regulatory overreach risks driving critical development overseas, threatening U.S. competitiveness,” added Lee Bratcher, president of the Texas Blockchain Council.

IRS: It’s About Tax Compliance

The IRS defends the rule as necessary for addressing tax gaps related to digital assets. It estimates the rule would affect:

• 650–875 DeFi brokers.
• Roughly 2 million U.S. taxpayers.

The rule, introduced in the 2021 Infrastructure Investment and Jobs Act and finalized in 2023, aims to increase transparency and tax compliance.

What’s at Stake?

The final outcome of the lawsuit could have significant implications:

• For the DeFi industry: A ruling in favor of the IRS may create compliance challenges for DeFi protocols, potentially driving innovation abroad.
• For U.S. taxpayers: The rule could mean stricter reporting obligations for crypto users.

This case highlights the ongoing tension between regulatory efforts and the decentralized nature of blockchain technology.