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The US House of Representatives has passed a bipartisan vote to dismantle the infamous IRS DeFi broker rule that required crypto institutions like DeFi platforms to collect and submit taxpayer and transaction information to the Internal Revenue Service.
According to a statement from the House, the bill received 292 votes for and 132 votes against, with supporters stating they believed the regulation would have hampered growth in the digital asset sector.
The Policy Was Too Broad to Apply
The proposed IRS DeFi broker rule arose from provisions in the 2021 Infrastructure Investment and Jobs Act, which the Biden administration designed to facilitate reporting on crypto-based transactions. Should it have been passed into law, the rule would have classified crypto exchanges, DeFi platforms, and any other digital asset firm as brokers, just like a traditional financial institution. As a result, the platforms would be obliged to aggregate, retain, and render a proprietary transaction data set for all their users to send to the IRS.
The supporters of the IRS DeFi broker rule were primarily members of the Democratic Party, who said then they needed to strengthen tax compliance in addition to cracking down on illegal financial activity. According to the taxman, the move would have enabled the government to collect billions of unpaid taxes. The critics, on the other hand, including crypto supporters and lawmakers from both parties, observed that the policy would be too broad and negatively impact the US crypto ecosystem.
Harm Businesses and Innovation
Speaking following the outcome of the vote, Representative Mike Carey, who submitted the repeal motion, said:
“The DeFi broker rule invades the privacy of tens of millions of Americans, hinders the development of an important new industry in the United States, and would overwhelm the IRS.”
Missouri Representative Jason Smith had earlier in the day urged fellow lawmakers to support the resolution to defeat the IRS DeFi broker rule, stating that the rule risked harming businesses and killing innovation. Smith said:
“There are real questions that the rule can even be administered […] DeFi exchanges are not the same as centralized crypto exchanges or traditional banks or brokers. DeFi platforms cannot and cannot even collect the information from users to implement this rule.”
IRS Attempted to use the Old Reporting Framework
Due to the nature of their operations, the IRS DeFi broker rule would have been nightmarish for DeFi platform operators to implement. Critics of the move alleged that the IRS attempted to create frameworks for decentralized systems using traditional financial reporting structures.
Unlike regular centralized exchanges, DeFi platforms have eliminated intermediaries and use smart contracts and blockchain protocols instead, making it impossible for them to collect and report on user data. Operators were concerned that the IRS DeFi rule would have placed an intolerable burden on blockchain startups, crypto operators, and software developers, eventually driving innovation away from the US.
Conclusion
The passing of the bill in the House to defeat the IRS DeFi broker rule is another significant step in the debate surrounding crypto regulation. The move demonstrates the growing influence of the crypto industry under the Trump administration and highlights the need for lawmakers to understand the technical and policy aspects of crypto when making their decisions.
Frequently Asked Questions (FAQs)
What was the issue with the DeFi broker rule?
The rule forced DeFi protocols to report user transactions to the IRS, thereby reducing tax compliance in the crypto world.
What is the effect of the Dismantling of the IRS DeFi Broker rule?
Without the IRS DeFi broker rule, users must report their income to the IRS and not depend on intermediaries like DeFi platforms.
What is the implication to the crypto industry?
The IRS rule would have imposed information collection rules on DeFi, but now the IRS cannot propose anything similar again.
What are the odds of the bill becoming law?
President Donald Trump must sign the resolution to become law. Given the administration’s support for the digital space, it could soon become law as a strategy to foster innovation in the digital asset sector.
Appendix: Glossary of Key Terms
DeFi: An emerging peer-to-peer system attempting to remove third parties and centralized institutions from financial transactions.
DeFi Broker rule: A proposed law that made all crypto and DeFi operators brokers who would have to submit reports of all transactions to the IRS for taxation purposes.
Bill: A draft of a proposed law or statute presented to a legislature for debate and potential enactment.
House of Representatives: The lower chamber of the United States Congress, with the Senate being the upper chamber.
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