Repealing the IRS DeFi Rule Marks a Temporary Victory for the Crypto Industry

The US Congress has recently voted to overturn the Internal Revenue Service's contentious decentralized finance broker rule, a major triumph for the crypto sector. Following this, President Trump has formally abolished the measure. However, this victory may be short-lived. In December 2024, the IRS proposed a rule that would have forced DeFi platforms to adhere to standard crypto broker tax regulations, including extensive user KYC and other disclosures. The crypto industry immediately pushed back, with several blockchain groups suing the IRS shortly after the rule was announced. DeFi platforms are not designed to collect such information, and the proposed rule conflicted with DeFi's primary objective of maintaining transaction transparency while protecting user privacy. Fortunately, this rule is likely to be scrapped under the current administration, following the US Senate's 70-28 vote against the ruling and the US House's 292-132 vote in favor of repealing the IRS DeFi broker rule. If the rule had been implemented, it would have severely impacted the US crypto industry and innovation beyond DeFi. As the operator of a crypto tax platform, I am aware that it would have significantly increased compliance costs and complexity for us. Nevertheless, this is far from the end of the story. The repeal of this rule was relatively straightforward due to its unworkable nature, even for government officials. However, it is likely that the IRS will return with a more subtle and carefully crafted rule targeting DeFi. Overturning this version does not prevent the agency from attempting again. I would not be surprised if the IRS embarks on a hiring spree for DeFi experts to assist with this, particularly after recruiting several crypto specialists in February 2024. The IRS believes it is missing out on significant crypto tax revenue and is pushing to expand its reach as much as possible. DeFi, being a privacy-focused sector, still involves financial transactions and will not be ignored anytime soon. The IRS will not take this rule's rejection lightly and may ramp up audits on US crypto users to ensure accurate filings. The US crypto industry must be proactive and push for regulatory clarity on DeFi to prevent misinformed and overstepping rules from resurfacing. The best time to advocate for fairer IRS tax rules is now. While crypto advocacy groups are doing a great job, the industry needs to be more persuasive in pushing for rules that distinguish between true brokers and self-executing smart contracts, ensure fair tax treatment for DeFi participants, and provide clear reporting guidance without stifling innovation. With a more pro-crypto environment in Washington, there is a chance to establish regulations before the pendulum swings back toward aggressive enforcement. This means there is a four-year window to get this in shape. While the crypto industry is engaging with the current administration, it must ensure these rules are fully passed, clarified, and set into law. Otherwise, it may face an even harsher regulatory regime under a future administration less friendly to decentralized technologies. The IRS's DeFi broker rule should serve as a warning: until a workable framework is in place, regulators will continue attempting to impose harsh rules on a technology they barely understand. And next time, the crypto industry might not be as fortunate in gaining enough votes for a repeal.