On Tuesday, the US House of Representatives passed a bipartisan vote to reverse an Internal Revenue Service (IRS) rule that mandates cryptocurrency institutions such as decentralized finance (DeFi) platforms collect and report taxpayer and transaction information.
This is another indication of the larger resistance to regulation believed to hamper growth in the digital asset sector.
The House passed the Congressional Review Act resolution to roll back the rule in the last days of outgoing ex-President Joe Biden’s administration with an overwhelming 292-132 vote. The move underscores the tug-of-war between regulators, eager to bring crypto under stricter safeguards, and lawmakers worried about damaging the economy.
The IRS rule on the table arose from provisions in the 2021 Infrastructure Investment and Jobs Act that were meant to strengthen reporting requirements on cryptocurrency transactions.
The rule would have classified DeFi platforms, crypto exchanges, and other digital asset firms as “brokers,” similar to traditional financial institutions. That means these platforms would need to aggregate, retain, and render a proprietary transaction data set for all their users to send to the IRS.
The rule’s backers, mostly from the Democratic Party, have said the regulations are needed to boost tax compliance, crack down on illegal financial activity, and produce money for public infrastructure projects. The IRS estimated the rule could help the US government collect billions of dollars in unpaid taxes.
However, the rule’s critics—including lawmakers from both parties, industry leaders, and crypto supporters—contended that the policy would be too broad and negatively affect the US digital asset ecosystem.
Democrats put up a spirited fight against the review but lost to a majority of Republicans
One of the members who criticized the rule the most was the Missouri Republican Jason Smith, the House Ways and Means Committee chairman. Before the House vote, he cautioned that the regulation could have “dire consequences on US businesses” and “stifle innovation” regarding blockchain technology.
Smith said there were “serious doubts” about whether the rule could be effectively administered. As he explained it, DeFi exchanges operated on an entirely different level than centralized crypto exchanges, traditional banks, or brokers. “If DeFi platforms are decentralized, they essentially lack access to and any means to collect the personal data regarding users that would be necessary to comply with the rule,” he said.
Due to the nature of the operation, the IRS crypto broker rule is difficult for DeFi operators to apply. Critics said the IRS was attempting to use traditional financial reporting frameworks on a decentralized system that, by its nature, operates differently.
Unlike centralized exchanges like Coinbase or Binance, DeFi platforms use smart contracts and blockchain protocols instead of intermediaries — rendering (if at all) collecting and reporting user data almost impossible, like stock brokers or banks. Many were concerned that the rule would place intolerable burdens on software developers, crypto startups, and blockchain projects, driving innovation offshore.
North Carolina Republican Rep. Tim Moore said the regulation went beyond the limits of what Congress had wanted when they passed the law in 2021. Moore argued that it burdened software creators with numerous requirements and endangered American leadership in creating digital assets.
Despite a wide bipartisan basis for overturning the IRS rule, Democrats waged an ardent opposition crusade, claiming the provision would encourage tax evasion and economic offences.
Illinois Democrat Danny Davis believed crypto-deal tracking should be similar to stock market trades, where brokers must report sales to the IRS. He explained that when people sell stock through a broker, the sale proceeds are reported to them and the Internal Revenue Service. Davis said that, not surprisingly, taxpayers are more prone to report their income when that form of independent reporting is available.
Rep. Lloyd Doggett (D-Texas) took a harsher tack, labelling the resolution “special interest legislation” and saying it would likely be gamed by tax cheats, drug traffickers, and terrorist financiers. He also said that overturning the rule would add nearly $4 billion to the national debt, a step that appears to counter the Republican Party’s stated priorities in fiscal policy. Doggett said that the resolution would open new avenues to avoid taxes and make it much easier for bad actors to take advantage of the system.
The bipartisan action by 70 US Senators to repeal the IRS regulation came through last week when they collectively voted to overturn the rule. However, budgetary rules will force the Senate to pass the resolution a second time before it can be sent to the White House for final approval.
Senior advisors to former President Donald Trump have already recommended that he sign the provision into law if it comes to his desk. If he did so, the IRS would be permanently barred from implementing a similar rule.
There has been no formal word from the White House yet. Still, the Biden administration and congressional Democrats will probably keep exploring other options to regulate and tax the crypto industry without Congress.
Lawmakers draw the line between regulations and innovations
The fight over the IRS’s proposed crypto rule is only one part of a bigger debate over how digital assets should be regulated in the United States.
Some key questions are still disputed: how to enforce tax compliance without quelling innovation, where consumer protection should end, financial privacy should begin, and whether decentralized finance platforms constitute a new class of assets subject to existing law.
There are also questions over what role the United States should play in crafting global cryptocurrency regulations.
Though some analysts call for comprehensive and bespoke crypto regulations, echoing the industry’s unique character, a few have expressed concern over whether heavy-handed enforcement would simply chase away blockchain founders and investors to more crypto-friendly jurisdictions like Singapore, Switzerland, and the UAE.
For now, however, reversing the IRS rule is being viewed as a victory for crypto users, DeFi developers, and blockchain startups. If it finally passes and is signed into law, U.S.-based crypto platforms will remain exempt from burdensome broker reporting requirements, easing compliance costs and administrative burdens.
But that does not mean there will be no taxes on crypto transactions. Users will still need to report capital gains and losses on their crypto holdings to the IRS, and the agency is likely to pursue other means to increase tax compliance in the space.
With the Senate set to vote soon on the resolution and the Biden administration considering how to react, cryptocurrency regulation has become full of unknowns. What’s clear, however, is that the battle for crypto’s rightful role in the financial system is just beginning.
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