- Trump rescinds IRS rule that imposed tax reporting for validators and DeFi participants
- Passed as part of the Congressional Review Act
- The repeal takes effect immediately
- IRS will not be able to enact similar rules in the future without Congressional input
Trump rescinds an IRS rule that imposed tax reporting for DeFi validators and participants, which could fundamentally impact the motivations and processes of participants, investors, and developers of DeFi products and ecosystems.
This marks the first time in history that a president has signed a direct executive order to deregulate the crypto industry, as it was mentioned back by U.S. House Committee on Ways and Means Chairman Smith as “impractical, unconstitutional and stifles innovation.” The repeal takes effect immediately and strips the IRS of the right to make such rules in the future without Congress.
Why Is the Repeal of the IRS Rule a Highly Important Event for the Whole DeFi?
Let’s look a little more closely at exactly what restrictions Trump has freed DeFi from by repealing the IRS rule. The introduction of the IRS rule expanded the concept of a ‘broker’ and began to extend it to participants in the blockchain infrastructure, including:
- Validators
- DeFi protocols
- DEX platforms
- Non-custodial wallets and smart contracts
- Node operators and miners
Thus, if a ‘broker’ runs a node or validates a block, but does not participate as a party – this also requires reporting the transactions and completing the following forms:
- Filling out the 1099 form (tax reporting) for transactions
- Collecting KYC information on users (name, address, SSN) if they use this protocol or a validated circuit
- Reporting on the “receipt” of digital assets, even if there is no access to them (e.g. DeFi pools or nodes)
Of course, given the technical features of DeFi this was at least difficult and at most impossible in some cases, the validator does not know the counterparties, does not determine amounts, does not have access to private keys, and cannot even identify users in most cases.
This is exactly what U.S. House Committee on Ways and Means Chairman Smith meant by the IRS rule being “impractical, unconstitutional, and stifles innovation.”
This was refreshed quite meaningfully by U.S. Representative Mike Carey:
“The DeFi Broker Rule needlessly hindered American innovation, infringed on the privacy of everyday Americans, and was set to overwhelm the IRS with an overflow of new filings that it doesn’t have the infrastructure to handle during tax season. By repealing this misguided rule, President Trump and Congress have given the IRS an opportunity to return its focus to the duties and obligations it already owes to American taxpayers instead of creating a new series of bureaucratic hurdles. I thank President Trump for signing this important bill into law and Crypto Czar Sacks for his leadership in supporting America’s continued place as the global leader in the emerging crypto industry.”
Conclusion
Overall, this was a pretty clear example of a government system that had little understanding of the DeFi industry but set regulations that were mandatory and often impossible to enforce.
This is exactly what the new SEC administration and Crypto Task Force are working hard to accomplish, and promises us a fundamentally different, more thoughtful, and effective approach to regulating the blockchain and crypto industry. Stay tuned for updates, be adaptive in the rapidly evolving regulation, financial, and crypto landscape, and keep your strategy grounded, balanced, and beneficial.
