Industry Groups Take IRS to Court Over DeFi ‘Broker’ Rule: Why It Could Be a Game Changer

• DeFi groups challenge IRS’ expanded “broker” rule, arguing it misdefines key roles in crypto.
• Industry says IRS rule would hurt U.S. competitiveness, stifle innovation
• DeFi Developers Suing IRS Over New Reporting Rules That Will Violate Privacy and is Burdensome

The DeFi Education Fund, Blockchain Association, and Texas Blockchain Council have filed a lawsuit against the U.S. Department of the Treasury and the Internal Revenue Service (IRS) regarding the agencies’ finalized “broker” rule in a critical legal move.

The new requirement—which broadly expands the definition of an entity class they termed “broker” to include decentralized finance (Defi) trading platforms—goes beyond the authority of the IRS and Treasury, given its statutory remit, the groups said.

The suit, initiated on Dec. 27, 2024, objected to the rule on grounds of alleged violations of the Administrative Procedure Act (APA) and constitutional concerns.

At the center of the lawsuit is the IRS and Treasury’s decision to expand the definition of “broker, which now encompasses entities that provide front-end trading services for DeFi, even if they do not facilitate the transaction themselves.

DeFi protocols run separately from any network, and users can conduct financial actions without an intermediary party. Developers generally do not control or execute transactions. The industry groups argue that this misinterpretation of the term “broker” would impose undue compliance obligations on developers of DeFi software.

Many stakeholders in the digital asset industry publicly commented with strong objections to the proposed changes during the rule’s comment period. Critics said the authority would impose compliance burdens on parties that help provide the infrastructure for DeFi trading but do not execute trades themselves.

Even so, the IRS and Treasury moved forward with finalizing the rule, which failed to address important input despite the plaintiffs’ claim and could have dire repercussions for the sector’s growth in the U.S.

The groups suing the new rule have argued it will hinder innovation in the quickly evolving DeFi space, possibly pushing important development overseas. They fear compliance burdens will erode the United States’ competitive advantage in the digital economy. 

The DeFi Education Fund specifically cited the decentralized finance movement’s push for more open and streamlined financial tooling, arguing that the new regulation will hinder innovation.

The lawsuit was filed in Federal District Court in the Northern District of Texas, where the plaintiffs seek to overturn the rule. They maintain that the IRS and Treasury’s actions exceed their legal authority, invaliding the rule.

With the legal drama continuing to play out, a cloud hangs over the digital asset space, waiting to see if the outcome will further impact the future of DeFi development in the U.S.