U.S. Cryptocurrency Broker Tax Regulations: How the DeFi Ecosystem and the Entire Industry Should Respond?
1 Quick Overview of the New Rules
On December 30, 2024, the Internal Revenue Service (IRS) under the U.S. Department of the Treasury released the Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital Asset Sales, finalizing tax reporting obligations for cryptocurrency sales and trading brokers (hereinafter referred to as “cryptocurrency brokers”). According to the new rules, a cryptocurrency broker is defined as “any person who, for consideration, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of others” (in the U.S., the term “digital assets” is equivalent to cryptocurrencies). These brokers must submit tax information returns, similar to other types of brokers. [1]A key focus of the rule is its inclusion of DeFi front-end platforms as cryptocurrency brokers, mandating these platforms to comprehensively report users’ tax details.
① Scope of Brokers
– Entities Considered Brokers
– Centralized exchanges
– Decentralized exchanges
– Wallets with trading functionality: These include wallets that allow users to buy, sell, and trade cryptocurrencies directly on their platforms, such as Phantom.
– Cryptocurrency ATMs and kiosks: Includes Bitcoin ATMs and other cryptocurrency transaction terminals.
– Entities Not Considered Brokers
– Blockchain maintainers: Miners, node operators, etc., who only participate in blockchain maintenance without directly facilitating transactions.
– Non-trading hardware wallets: Wallets requiring connections to external exchanges for transactions; their providers do not directly engage in transactions.
– Indirect service developers: Developers creating software for exchanges but not directly involved in trading activities.
– Smart contract developers: Those earning income from smart contracts but not responsible for their maintenance or updates.
② Why DeFi Front-Ends Fall Under Regulation
DeFi service providers use distributed ledger technology to offer investment and financial services, akin to securities brokers or exchanges. The IRS states that “trading front-end services” include:
Receiving user-submitted transaction orders.
Providing intuitive user interfaces (graphical or voice-based) for detailed transaction input.
Transmitting transaction data accurately to distributed ledger networks for blockchain execution.
Even if DeFi front-ends do not custody user funds or private keys, they are deemed brokers under 26 CFR §1.6045 due to their role in initiating and executing transactions. The IRS further clarified that intermediaries (e.g., DeFi aggregators) do not alter this classification.
③ Obligations of Cryptocurrency Brokers
– Tax Reporting Requirements
Cryptocurrency brokers (including DeFi front-ends) must use the IRS-designated Form 1099-DA to report all transaction details to users and the IRS. Required information includes:[2]
Broker’s Taxpayer Identification Number (TIN) with the last four digits displayed for privacy.
CUSIP number (if applicable).
Cryptocurrency code/name.
Number of units sold/exchanged.
Transaction timestamp.
Total proceeds.
Cost basis.
Accrued market discount.
Wash sale loss disallowance (for assets taxed as securities).
Backup withholding (if triggered).
Short-term/long-term capital gains.
Non-cash proceeds (e.g., goods/services).
State/local tax information.
– Compliance Obligations
Implement KYC policies：To meet stringent reporting standards, brokers must fully implement KYC (Know Your Customer) policies. This includes collecting, verifying and recording the identity of customers to ensure the legality and transparency of transactions.
Monitor transactions for anti-money laundering (AML) and counter-terrorism financing (CFT)：As important participants in the financial markets, brokers are obliged to monitor and report suspicious transactions to assist in anti-money laundering and counter-terrorism financing efforts. This requires brokers to have a sound transaction monitoring system and reporting mechanism to detect and block potential illegal activities in a timely manner.
– Security and Safeguarding Obligations
Protect user assets：Although the broker may not directly hold client funds or private keys, the broker is still required to ensure the security of the trading process to prevent the loss of client assets. This includes taking the necessary technical measures and security management measures, such as encryption technology, firewalls, etc., to prevent hacker attacks and data leaks.
Provide transaction guarantees：Brokers should provide trade safeguards, such as trade confirmation, rollback after a trade failure, etc., to ensure the accuracy and reliability of the trade.In the event of a transaction dispute, the broker should actively assist in resolving it and provide the necessary support and assistance to the client.
2 Why the DeFi Ecosystem Is Impacted
The IRS’s expanded definition of “cryptocurrency brokers” directly affects critical DeFi components.Specific types of items that are subject to constraints include:
① DeFi Front-Ends (DEXs & Aggregators)
Platforms like 1inch and Jupiter must record wallet addresses, transaction amounts, and generate Form 1099-DA.
② Custodial Wallet Providers
Non-custodial wallets (e.g., Phantom) face regulatory ambiguity.
③ Privacy Protocols
Zero-knowledge proof-based services must balance anonymity with IRS reporting.
④ Payment Processors
On-chain payment projects involving asset sales must comply.
In general, if the new regulation is not overturned in the end, or more than 60% of the head DeFi projects face direct constraints due to the provision of front-end services, the remaining projects may also be affected if they involve user trading behavior. Even if these platforms do not hold users’ assets, as long as they provide core services such as deal making and order execution, they are required to comply with IRS reporting requirements, and they are required to report details of each transaction to the IRS, including the type of transaction, the amount of the transaction, the date of the transaction, and the user’s identity information (such as wallet address).
3 U.S. Regulatory Trends in Cryptocurrency Compliance
In recent years, the United States has continued its efforts on compliance issues in the crypto industry by introducing a series of new regulations, investigations and lawsuits against related companies, and imposing severe penalties in an attempt to maintain market stability and protect investor rights. In terms of new regulations, in addition to this new regulation, the IRS has previously announced the implementation of a third-party reporting system for cryptocurrency transactions from 2025, and centralized trading platforms such as Coinbase and Gemini will be required to report users’ cryptocurrency transaction information to the tax authorities for the first time. [3]In terms of investigation, punishment and litigation, CFTC, SEC and DOJ have also acted frequently in recent years. The following table summarizes the more famous cases in recent years, which objectively reflects the importance of compliance issues in the United States.
| Entity | Year | Violation | Agency | Penalty |
| Empires X | 2022 | Fraudulent high-return promises; misappropriation of funds | CFTC | $130M+ in fines and restitution |
| MicroStrategy CEO Sylor | 2022 | Tax evasion via false residency claims | DC Government | $40M settlement |
| OKX Seychelles Subsidiary | 2022 | Unlicensed money transmission in the U.S. | DOJ | 421M revenue forfeiture |
| Coinbase | 2023 | Operating unregistered securities exchange and staking program | SEC | Lawsuit dismissed (2025) |
| Binance & CZ | 2023 | Unlicensed securities trading via BNB | SEC | $4.3B fine |
| Terraform Labs & Do Kwon | 2023 | $10B algorithmic stablecoin fraud | SEC | $4.5B penalty |
| Roger Ver (“Bitcoin Jesus”) | 2024 | Tax evasion ($48M) | IRS | Awaiting trial |
4 Potential Impacts on DeFi
① Surge in Compliance Costs
-Technical Costs
If you plan to develop a high-throughput off-chain data tracking system for public chains to meet their high TPS (transactions per second) needs, the system will acquire on-chain transaction data in real time through apis and process and store the data. The data will be stored in a high-performance database to ensure its security and reliability, while being tied to the user’s identity for accurate data management and analysis. Estimates for such projects range from $150,000 to $600,000. The development team will consist of three to five developers, one architect, and one operations person. Staffing costs for the team are expected to range from $90,000 to $450,000, depending on staffing and project complexity. In addition, the project will need to invest in infrastructure such as cloud services, encryption technology and security compliance, which is expected to add $20,000 to $50,000 in one-time security costs. At the same time, the operation and maintenance cost of the system is expected to be between $10,000 and $30,000 per month, mainly for server maintenance, data backup and security monitoring.
-Legal Costs
Based on the hourly wage of U.S. attorneys (about $500 / hour) and the demand for legal advice from the DeFi project, we can estimate the time and cost of legal advice over a year. The specific analysis is as follows:
Regulatory Interpretation and Compliance Planning: Expect 80-120 hours and $40,000-60,000.
Ongoing legal advice and documentation: 30-50 hours per quarter, 120-200 hours per year, $60,000 – $100,000.
User compliance review and documentation update: 15 to 30 hours per month, 180 to 360 hours per year, and $18,000 to $36,000.
Taken together, the total legal consultation time in a year is between 380 and 680 hours, and at $500 / hour, the total cost ranges from $190,000 to $340,000. The final cost depends on the complexity of the project and the amount of work involved. If the project is more complex, the cost of legal advice can be closer to $340,000.
-Operational Costs
Third-party authentication service fees: Most DeFi projects will choose to work with third-party authentication services (such as Onfido, Jumio, Trulioo, etc.). These services typically charge per user verification, and in the case of Jumio KYX, fees range from $1 to $5 per verification, depending on the type of verification and the provider’s pricing. For example, for a combination of authentication and address authentication, a single authentication might cost $3-$7.
API integration fees: Integrating KYC processes into existing platforms requires developer support, involves interfacing with third-party apis, and may incur API usage fees, technical support fees, etc. These fees vary from platform to platform and can be several thousand dollars per month.
Human audit costs: While many KYC processes can be automated, there are still some high-risk or complex user validations that require human reviews, especially for doubtful users. Manual audits are costly, typically $50-$200 per hour, and can cost thousands to tens of thousands of dollars per month.
Therefore, assuming a DeFi project performs 100,000 KYC validations per year, at $5 per verification, the cost of verification alone could be $500,000, and with technology integration, compliance consulting, and data storage fees, the annual cost of the entire KYC process could reach hundreds of thousands or even millions of dollars. It varies depending on the size of the project, compliance requirements and number of users.
② Decline in User Activity
-KYC Resistance
Decentralization and anonymity are the core characteristics of the crypto industry, and mandatory KYC will directly increase the complexity of on-chain interactions, causing users to worry about personal privacy, which may lead users to turn to the privacy chain or reduce their participation in the crypto industry.
-Reduced Liquidity
Regulatory tightening will create a liquidity crunch in the crypto market, which is the result of a combination of subjective market sentiment and objective risks. At the same time, reduced liquidity may also lead to a decline in trading depth and an increase in slip points, further affecting the user trading experience and leading to more capital outflows. This will not only cause trading volume and revenue loss for the project side on the chain, but also affect the market competitiveness and sustainable operation ability of the entire public chain.
5 How FinTax Supports the DeFi Ecosystem
Focusing on Web3 finance, FinTax provides automated, professional crypto asset financial management services to serve clients worldwide, including public companies and top digital currency operators. At the same time, the FinTax platform has been officially recognized by TON, MetaMask and TG. The FinTax team is located in North America, Hong Kong, Singapore, Europe and other places, with a broad international perspective and rich experience, and can tailor comprehensive financial and tax solutions for customers according to the actual situation of different jurisdictions.
In response to the challenges of the new tax regulations for crypto asset brokers, FinTax is able to provide the following services for the DeFi ecosystem:
- Intelligent tax analysis based on the user’s wallet address: By analyzing the user’s wallet address, it identifies the tax scenarios involved and helps users understand the tax liabilities that may arise from their crypto asset transactions.
- Tax calculation and statement filling based on the user’s wallet address: based on the user’s wallet transaction records, the tax payable is automatically calculated, and the tax return is generated in accordance with the requirements of the relevant tax jurisdictions, simplifying the user’s tax declaration process.
[1] https://www.irs.gov/zh-hans/filing/digital-assets
[2] https://www.irs.gov/pub/irs-dft/f1099-da.pdf
[3] https://edition.cnn.com/2025/01/16/business/crypto-investors-third-party-tax-reporting-1099-irs/index.html