What You Need To Know
- The IRS published final regulations for broker reporting in DeFi on December 27, 2024, effective starting January 1, 2027.
- Front-end service providers and other services providers who provide "effectuating services" would be subject to these reporting obligations.
- Validation services are explicitly exempt from these reporting obligations.
- Infrastructure service providers do not appear to be covered.
The U.S. Treasury Department and the Internal Revenue Service (IRS) released final broker reporting regulations with respect to DeFi on December 27, 2024, in T.D. 10021. These final regulations apply to sales of digital assets on and after January 1, 2027.
The final regulations focus on front-end providers, including graphical user interfaces and similar software programs which allow users to operate trading protocols, stating that they are in a “position to know” the nature of the transaction potentially giving rise to gross proceeds from a sale of digital assets. Treas. Reg. § 1.6045-1(a)(21)(iii)(A). The position to know standard has been broadened since the regulations were first proposed adding front-end service providers that have “control or sufficient influence” over the services they provide, in addition to front-end service providers who have the ability to charge or alter fees. Treas. Reg. § 1.6045-1(a)(21)(ii). Such front-end service providers would be subject to broker reporting.
Two newly added examples in the final regulations describe the applicability of these rules where a front-end service provider helps to effect digital asset transactions in exchange for a 1% transaction fee. In both examples, the service provider must report the transactions it helps to effect via its front-end services, but it does not have to report its validating activities or its provision of unhosted wallet software where a user directly transmits its digital assets to another person without using the service provider’s front-end software. Treas. Reg. §§ 1.6045-1(b)(24) and (25).
Validation services are expressly carved out from reporting requirements under the final regulations. Treas. Reg. § 1.6045-1(a)(21)(iii)(C).
Other service providers who provide “effectuating services” would be treated as digital asset middlemen, too. Treas. Reg. § 1.6045-1(a)(21)(iii)(B). Effectuating services include digital asset payment processing services, real estate, securities, and commodities transactions involving digital assets, and certain digital asset kiosk transactions.
The final regulations do not appear to cover the infrastructure service providers that we previously covered in our Tax Notes article, Who Is a Broker? Reporting Rules for Digital Asset Transactions. This leaves uncertainty as to whether such providers are explicitly exempt from these regulations.
With the new Administration taking office, possible Congressional action on broker reporting, an applicability date of January 1, 2027, and a very lengthy preamble in which the IRS attempts to justify its authority to issue these regulations, it is highly likely that these regulations will not be the final word on this subject.
The IRS has also provided transitional guidance in Notice 2025-03.
