Blockchain Association Sues IRS Over New Crypto Regulations

The Blockchain Association, in collaboration with the Texas Blockchain Council, has launched a lawsuit against the U.S. Internal Revenue Service (IRS) over its latest cryptocurrency regulations.

The legal challenge, announced on Dec. 28, pushes back against the IRS’ new rules requiring brokers to report digital asset transactions, which are set to take effect in 2027.

Under these final regulations, brokers will be mandated to report gross proceeds from cryptocurrency and digital asset sales, as well as details about taxpayers involved in such transactions.

New IRS Rules Broaden Definition of Broker

The rules broaden the definition of a “broker” to include decentralized exchanges (DEXs) and front-end platforms that facilitate digital asset transactions.

Kristin Smith, CEO of the Blockchain Association, stated in a social media post that the lawsuit argues the IRS’ rulemaking violates the Administrative Procedure Act and infringes on constitutional rights.

“We stand with our nation’s innovators and will continue working to ensure the future of crypto — and DeFi — is here in the United States.”

Today we’re taking action, filing a lawsuit that argues today’s broker rulemaking violates the Administrative Procedure Act and is unconstitutional.

We stand with our nation’s innovators and will continue working to ensure the future of crypto – and DeFi – is here in the United… https://t.co/CwZWzjwT5O

— Kristin Smith (@KMSmithDC) December 28, 2024

The new rules have raised concerns among blockchain developers and decentralized finance (DeFi) advocates.

Platforms using smart contracts to facilitate transactions could now be classified as brokers, placing significant compliance burdens on developers of DeFi front-ends.

The Blockchain Association has criticized the IRS for imposing “unlawful compliance burdens” on software developers, warning that this could stifle innovation in the U.S.

The broader crypto community fears these regulations could drive DeFi innovation offshore.

Marisa Coppel, Head of Legal at the Blockchain Association, described the rules as a privacy violation, stating that requiring DeFi platforms to report user data would undermine the core values of decentralization.

Legal experts have drawn parallels to the case of Tornado Cash developer Alex Pertsev, who was sentenced to over five years in prison for facilitating illicit transactions through non-custodial software.

The precedent adds weight to concerns about the potential criminalization of developers under these rules.

The IRS estimates that between 650 and 875 DeFi brokers, along with up to 2.6 million U.S. taxpayers, will be impacted by the regulations.

Brokers will need to start collecting transaction data in 2026 for reporting requirements starting in 2027.

Industry Analysts Outline Possible Paths Forward

Industry analysts have outlined possible paths forward for DeFi platforms if the regulations are not overturned.

Alex Thorn, head of research at Galaxy Digital, suggested that platforms could either comply with the broker designation, block U.S. users, or operate as decentralized applications with minimal user interaction and no transaction fees to avoid broker classification.

“No shortage of ways to challenge this, and it absolutely should be challenged,” Uniswap Chief Legal Officer (CLO) Katherine Minarik said in a December 27 post on X.

She questioned the IRS’s rationale, arguing that the ruling incorrectly classifies DeFi platforms as brokers, despite their role being only a part of transaction processes.

Uniswap CEO Hayden Adams expressed similar concerns, stating that he hopes the ruling will be overturned through the Congressional Review Act (CRA) or legal challenges.