The IRS has released its long-awaited regulations for decentralized finance (DeFi), marking a significant change for trading platforms and their users.
While these rules largely target DeFi trading platforms rather than individual taxpayers, they will impact how DeFi platforms operate and the experience of their customers.
Under Section 6045 of the US tax code, brokers are required to collect know-your-customer (KYC) information from customers, calculate gains and losses, and report this data to the IRS via forms like 1099-B. Last year, the IRS expanded these rules to include custodial cryptocurrency brokers like centralized exchanges (CeFi). Now, the IRS has clarified how these rules apply to the DeFi ecosystem.
- Interface Layer: This layer allows users to interact with DeFi platforms, including screens, buttons, forms, and other visual elements on websites, mobile apps, and browser extensions.
- Application Layer: This layer facilitates the execution of trades, including verification and recording of transactions on the blockchain.
- Consensus layer: Responsible for recording financial transactions on the distributed ledger, including transactions made by users trading digital assets using DeFi protocols.
The IRS will only treat Interface Layer (front-end commerce services) as “intermediaries” under the new regulations. These platforms, which have the most direct contact with users, will now face stricter reporting requirements.
Starting January 1, 2027, DeFi platforms operating as front-end trading services must:
- Collecting KYC information from customers during onboarding, similar to centralized exchanges.
- Tracking client transactions and reporting income to both the IRS and clients via Form 1099-DAs.
If you are a customer of a front-end DeFi platform, here is what you should expect:
- KYC Requirements: Similar to the onboarding process for centralized platforms, you will be required to provide your personal information for identification purposes.
- Tax Reporting: While platforms will report trading income, you will still need to use crypto tax software to track your cost basis and calculate your gains or losses.
*This is not investment advice.
