The world of digital assets is set for a seismic shift as the Department of the Treasury and the Internal Revenue Service (IRS) unveil their final regulations on broker reporting. In a move that has been years in the making, these new rules will require brokers facilitating digital asset transactions to report gross proceeds—an effort aimed at enhancing tax compliance and closing reporting gaps in the decentralized finance (DeFi) sector.

A Long Road to Finalization
The journey to these final regulations began with the Infrastructure Investment and Jobs Act of 2021, which expanded the definition of a broker to include those involved in digital asset transfers. Recognizing the complexity of the crypto space, the IRS opened the floor for public feedback, receiving over 44,000 comments from industry players, legal experts, and concerned citizens. Now, after rigorous evaluation, the IRS has issued its final decision, cementing the role of digital asset facilitators in tax reporting.

Who’s a Broker Now?
The new rules broaden the definition of brokers to include not only traditional custodial exchanges but also DeFi participants engaged in facilitating digital asset sales. Trading front-end service providers—those who enable users to initiate transactions—are now classified as brokers. However, other players, such as blockchain validators and communication node operators, have been granted an exemption, as their roles do not directly facilitate sales.

DeFi and the Digital Asset Ecosystem
The IRS has carefully dissected the decentralized finance landscape, categorizing it into three layers:

• Interface Layer – Platforms providing user interfaces to initiate trades.
• Application Layer – Protocols that execute trades within the DeFi ecosystem.
• Settlement Layer – Distributed ledger networks where transactions are recorded.

While custodial exchanges have always been required to report transactions, DeFi platforms that provide trading front-end services now fall squarely under the IRS’s definition of a broker. Meanwhile, non-custodial wallet providers and other DeFi services that do not directly effectuate transactions remain outside the reporting requirements.

Ensuring Fair Reporting Without Overreach
The IRS recognizes the complexity of crypto transactions and has implemented a multiple broker rule to prevent duplicative reporting. Under this rule, only the broker crediting the customer’s wallet or account will be responsible for reporting the transaction to the IRS. Additional guidance will be issued to clarify how this rule applies to DeFi platforms, where multiple participants may be involved in a single transaction.

Addressing Legal and Constitutional Concerns
Unsurprisingly, the new regulations have sparked legal debates. Critics have raised concerns about potential violations of the First, Fourth, and Fifth Amendments, arguing that the rules may be overly broad and impose excessive burdens on decentralized platforms. The IRS, however, maintains that the regulations are in line with existing financial reporting obligations and are crucial for tax enforcement.

A Phased Approach to Compliance
Recognizing the challenges of implementation, the IRS has introduced a phased compliance timeline. While custodial brokers must begin reporting in 2025, DeFi brokers and trading front-end service providers have been given an extended deadline until January 1, 2027. Additionally, backup withholding requirements will not take effect until 2028, providing extra time for the industry to adapt.

A Turning Point for Digital Asset Regulation
As the IRS sets the stage for stricter digital asset oversight, the industry faces a new reality—one where transparency and tax compliance are no longer optional. While these regulations bring clarity, they also pose challenges for DeFi platforms and non-traditional financial services that have thrived in a largely unregulated space. The coming years will be crucial as the crypto industry navigates these changes, ensuring that innovation and compliance can coexist in this evolving financial landscape.