Industry groups sue to stop IRS from collecting user info from DeFi front-ends

The Blockchain Association, the DeFi Education Fund, and the Texas Blockchain council have filed a lawsuit challenging a recently-finalized IRS rule that would require some decentralized finance (DeFi) brokers to store and report users' personal information and trading history to the agency starting in 2027. 

The controversial rule's finalization was met with widespread criticism from crypto industry experts, who argue that the rule would create an undue burden on certain DeFi protocols to collect, protect, and report sensitive personal information on users, even when it's unclear which entity would perform those functions. 

“Not only is this an infringement on the privacy rights of individuals using decentralized technology, it would push this entire, burgeoning technology offshore," said Marisa Coppel, the top lawyer at the Blockchain Association. 

The lawsuit contends that the nature of DeFi should exempt protocols from the reporting requirement and that imposing the rule would be a statutory overreach that could "effectively end the DeFi industry." 

"DeFi, in contrast [to traditional finance], does not rely on intermediaries like brokers," the lawsuit argues. "Instead, users maintain custody over their own digital assets and transact directly with each other using software. There is simply no broker-like entity involved in a decentralized transaction." 

The IRS' final rule responds to some comments left by industry figures, arguing that the reporting requirement "...would benefit tax compliance by helping to close the information gap with respect to digital assets." The rule comes as a result of changes to broker-reporting regulations made by the Infrastructure Investment and Jobs Act passed in 2021, and was first proposed in August 2023. 

"This regulatory overreach risks driving critical development overseas, threatening US competitiveness in the digital economy," said Lee Bratcher, president of the Texas Blockchain Council. 

The rule could affect "approximately 650 to 875 DeFi brokers, with a mid-point of approximately 765 DeFi brokers," according to the IRS' own estimate, along with a rough estimate of around 2 million U.S. taxpayers.