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DeFi KYC Implementation on the Horizon? IRS Targets Crypto Tax Reform: AMMs, Crypto Wallets Seen as Brokers

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DeFi KYC Implementation on the Horizon? IRS Targets Crypto Tax Reform: AMMs, Crypto Wallets Seen as Brokers

The IRS may introduce new tax regulations for the cryptocurrency sector by 2026, requiring all service providers and platforms involved in transactions, such as MetaMask and Uniswap, to be classified as brokers, responsible for tracking user gains and losses and assisting in tax reporting. This could significantly impact the decentralization of DeFi.

IRS Targets Crypto Tax Reform

According to the new regulations released by the Internal Revenue Service (IRS) in the United States, cryptocurrency asset trading brokers will be required to report using a new form called "1099-DA." The IRS claims that this change is aimed at helping taxpayers simplify tax filings, reduce tax fraud, and eliminate the complex calculations previously required for submitting tax returns.

The new IRS regulations are open for public comment until October 30 and will then undergo at least one public hearing. If successful, the regulations could go into effect in 2026, requiring brokers and users to report cryptocurrency asset trading records for the year 2025.

However, the new IRS regulations have sparked considerable controversy in the crypto space.

What Does 1099-DA Record?

According to the Gordon Law Group, 1099-DA covers sales information of cryptocurrencies, NFTs, and stablecoins, similar to stock sales information in Form 1099-B. This includes:

  • Cost

  • Purchase Date: Date of acquiring the cryptocurrency

  • Sale Date: Date of sale or trade

  • Sales Income

  • Total Revenue: Total revenue from trades on exchanges or brokers, excluding costs

DeFi and Crypto Wallets Included

According to the proposed regulations, the definition of brokers is quite broad:

  • Crypto wallets

  • Crypto payment processors

  • Centralized exchanges

  • Decentralized exchanges AMM platforms are explicitly mentioned below

End-to-end trading platforms and AMM are classified as trading brokers

Cryptocurrencies and NFTs are also covered. If the new regulations go into effect, these platforms and service providers will need to provide 1099-DA to users to assist with tax preparation, indicating that implementing KYC mechanisms in DeFi is becoming necessary, which has caused significant pushback from industry players.

Reuters quotes Miller Whitehouse-Levine, CEO of the DeFi Education Fund, stating:

The IRS proposal is confusing, contradictory, and misleading, attempting to introduce a regulatory framework with intermediaries into applications without intermediaries.

Delphi Labs: Disastrous Proposal

Gabriel Shapiro, Legal Director at Delphi Labs, tweeted that this means all DeFi infrastructure will be classified as brokers, requiring tracking of user profit and loss data and sending tax reports.

He believes that this will be a devastating blow to peer-to-peer DeFi protocols like AMM in the United States. He speculates that MetaMask will soon implement KYC and tax reporting, potentially affecting services like Etherscan and even DAOs.

The IRS's crypto tax reform is an extension of the U.S. infrastructure bill, as authorities have long viewed crypto transactions as an area rife with tax evasion loopholes. However, the U.S. Treasury had previously excluded crypto wallets from the definition of brokers but has now included them once again.

  • Infrastructure Bill: U.S. Treasury has no intention of including miners, wallet providers, or DeFi engineers as brokers

  • Biden's G7 Targets Crypto Transactions: Tax policies are unlikely to relent