IRS Scraps DeFi Reporting Rule: A Win or a Tax Trap?

The Senate has moved to repeal the IRS’s reporting requirement for decentralized finance (DeFi) brokers after a previous move by the House. The move is a significant shift for the cryptocurrency sector, as many had been concerned about the compliance hurdles and the potential for innovation stifling by the rule. The repeal does not mean that DeFi transactions are tax-exempt, but it is an indication of a continued lack of regulatory guidelines.

DeFi platforms operate without the traditional know-your-customer (KYC) and tax reporting requirements seen in centralized exchanges. As a result, regulators have little oversight of taxable income generated through these platforms. For crypto investors, this means the responsibility of tracking and reporting taxable gains remains entirely on their shoulders.

The Existing Reporting Framework for Crypto Transactions

While the DeFi broker reporting rule has been repealed, the centralized exchanges in the United States still have to report to Section 6045 of the tax code. Beginning in 2026, taxpayers who exchange digital assets on platforms such as Coinbase and Kraken will be issued a Form 1099-DA for transactions in the tax year 2025.

However, this doesn’t necessarily make tax reporting easier. For the 2025 tax year, these forms will only provide gross proceeds, leaving taxpayers to manually calculate their cost basis and capital gains. While cost-basis reporting will be introduced for the 2026 tax year, it will only apply to assets that remain within the exchange. Investors who transfer their assets to self-custody wallets will still face the challenge of tracking their cost basis and gains.

Compliance Challenges for Crypto Investors

Even without the DeFi broker reporting rule, investors are still responsible for ensuring they accurately track and report their taxable transactions. Since 1099-DA forms may be incomplete, taxpayers and the IRS will have access to partial information, requiring investors to fill in the missing details themselves.

Crypto tax software is useful software for crypto traders and DeFi users. The software is used to group transactions, monitor cost basis, and report correctly, thus avoiding the possibility of overpaying taxes. Despite regulatory ambiguity, investors and tax experts must still closely maintain records and use reliable tax software to stay compliant.

The Need for a New Regulatory Framework

Repealing the DeFi broker reporting rule isn’t a goal; it’s merely kicking the can down the road until there’s another, even more specific regulatory fix. Though the repeal is claimed to reduce compliance costs and enable DeFi innovation, opponents worry it undermines the IRS’s ability to track tax compliance.

The challenge arises from the reality that traditional tax reporting frameworks were crafted for centralized entities, whereas DeFi thrives on smart contracts and peer-to-peer transactions. Instead of trying to confine DeFi within these outdated structures, lawmakers and regulators must create a framework that resonates with its decentralized essence. The implications are significant, as the Joint Committee on Taxation estimates that the repeal could result in a staggering $3.9 billion in lost tax revenue over the next decade.

What Tax Advisers and Investors Should Do Next

Despite the repeal, crypto investors trading on DeFi platforms are not off the hook when it comes to tax obligations. The IRS still has tools at its disposal, such as blockchain forensic analysis, to track unreported income. Tax professionals must remind clients of the importance of meticulous record-keeping, retaining all records, and the utilization of cryptocurrency tax software to maintain compliance.

Until there is regulation, the investors will need to be held responsible for compliance, as the responsibility will still rest with them. The best approach is to stay proactive, keep detailed records, and seek expert advice to avoid unexpected tax liabilities in the future.