The Internal Revenue Service (IRS) has unveiled its long-awaited regulations for decentralized finance (DeFi), introducing significant changes for platforms operating in the space. While the new rules primarily impact DeFi trading platforms, they will also affect individual taxpayers using these services.
The regulations stem from Section 6045 of the tax code, which mandates brokers to collect Know Your Customer (KYC) information, calculate gains and losses, and report this data to the IRS via Form 1099-B. This rule, already applied to traditional stock brokers and centralized crypto exchanges (CeFi), has now been extended to the DeFi ecosystem.
The IRS has identified three layers within the DeFi stack: the Interface layer, the Application layer, and the Settlement layer. Crucially, only the Interface layer, encompassing front-end trading services, will be classified as “brokers” under the new regulations. The IRS rationale is that these services have the closest relationship with customers.
What this means for DeFi front-end services:
Platforms providing interfaces for swapping coins, including websites, unhosted wallets, and browser extensions, will be required to comply with broker regulations. This includes collecting KYC information from users, tracking transactions, and reporting proceeds to both the IRS and customers using Form 1099-DA. These requirements will take effect for transactions occurring after January 1, 2027.
What this means for users of DeFi front-end services:
Users should anticipate changes similar to those experienced on CeFi exchanges. This includes providing KYC information during onboarding and receiving tax forms detailing proceeds. However, users will still need to utilize crypto tax software to track their cost basis, as the forms will not provide this information.
