Industry Leaders Unite Against Controversial U.S. Tax Policy Impacting DeFi
In a significant move, nearly every prominent figure in the cryptocurrency sector has banded together to urge Congress to abolish a U.S. tax regulation that they argue poses a substantial threat to the advancement of decentralized finance (DeFi) technologies. This regulation, according to industry experts, risks forcing much of the DeFi ecosystem into a restrictive classification akin to that of traditional brokers, thereby subjecting it to onerous data collection and reporting requirements.
The Internal Revenue Service (IRS), the tax division of the U.S. Treasury, enacted a crucial rule targeting digital asset brokers just between Christmas and New Year’s, right before the transition to President Donald Trump’s administration. The intention behind this rule was to apply similar information-reporting obligations on DeFi brokers as those imposed on established securities brokers and exchanges.
Recently, there has been momentum towards reversing these rules under the Congressional Review Act (CRA). Senator Ted Cruz, a Republican from Texas, introduced a resolution last week aimed at achieving this goal. In a united front, the crypto industry sent a letter on Wednesday, spearheaded by the Blockchain Association and supported by major players like Coinbase, a16z, Paradigm, Kraken, Uniswap, Anchorage Digital, and many others. This letter calls on Congress to rally behind Cruz’s initiative.
The letter articulates that, “The DeFi broker rule, finalized during the final days of the Biden administration, exemplifies regulatory overreach that fundamentally misconstrues the technology it seeks to regulate while disregarding Congress’s original intent.” It emphasizes the need for Congress to leverage its authority to overturn this federal agency regulation, providing “a clear and definitive path to roll back this detrimental rule before it can take effect.”
The industry representatives contend that the rule unfairly penalizes U.S. companies with stringent regulations that their foreign counterparts would not be obligated to follow when dealing with American customers. They warned that “This unique burden on American firms could stifle DeFi innovation in this country entirely.”
The CRA serves as a potent but occasionally blunt instrument in the legislative toolbox, experiencing a surge in use during President Trump’s initial term. Its bluntness lies in the secondary effect: any regulatory issue repealed through this method cannot be reintroduced in a similar manner, which may complicate efforts to implement more favorable regulations in the future. For instance, when Congress attempted to use the CRA to overturn the Securities and Exchange Commission’s (SEC) crypto accounting guideline, Staff Accounting Bulletin No. 121, critics argued that it would hinder future SEC initiatives to address accounting for digital assets. Although both chambers approved the CRA move, then-President Joe Biden vetoed the effort, leaving Trump’s interim SEC chief, Mark Uyeda, to pursue a similar objective through internal means.
To advance a CRA resolution, it must secure majority approval in both chambers of Congress before reaching President Trump for potential endorsement. Following the 2024 elections, an influx of pro-crypto lawmakers is expected to populate Capitol Hill. However, congressional attention is a limited resource, especially with pressing issues like the federal budget on the horizon.
Beyond the industry letter, other crypto advocacy groups are also voicing their concerns. A representative from the DeFi Education Fund expressed enthusiasm, stating that they are “thrilled” to witness the growing momentum against the “unworkable, unconstitutional” rule, emphasizing their commitment to preventing its implementation.
