Crypto Backers Sue IRS for Decentralized Exchange Final Rule (1)

The Blockchain Association sued the IRS, saying a recently finalized rule that requires certain cryptocurrency exchanges to comply with broker reporting requirements would harm the industry.

The rule exceeded the Treasury Department’s authority in violation of the Administrative Procedure Act by, among other things, expanding the definition of broker, the lawsuit filed in the US District Court for the Northern District of Texas said. DeFi Education Fund and Texas Blockchain Council are also plaintiffs.

READ MORE: Crypto Users Doubt IRS Decentralized Exchange Rules Have Teeth

The IRS said decentralized exchanges, or DeFi—which tend to be automated platforms not backed by a company with a team of people to identify and report the transactions—are brokers, according to the suit. It’s burdensome if not impossible, the Blockchain Association said, for those direct user-to-user exchanges to comply with broker reporting requirements.

Blockchain Association said decentralized exchanges aren’t brokers because they only provide software for users to interact with one another. Those exchanges would become brokers if they had to comply with the IRS reporting rules, according to the lawsuit. Those rules are also too costly for the decentralized exchange platforms.

“Many if not most DeFi companies and developers will move overseas or shutter altogether, with drastic consequences for DeFi users,” the lawsuit reads.

Blockchain Association said the rule’s definition of broker is broader than what Congress intended.

The lawsuit asserts four claims under the APA, saying the law is arbitrary and capricious. It also violates the Fourth Amendment because it “amounts to an unconstitutional search” and invades privacy rights of DeFi users, and the Fifth Amendment because “it is so vague that it does not give fair notice to regulated parties” on whether the rule applies to them, according to the lawsuit.

The plaintiffs want a court to vacate the rule and prevent the IRS from enforcing it. They also seek reasonable costs and attorney fees.

The IRS finalized the reporting rules for DeFi platforms Dec. 27, almost six months after finalizing the rules for centralized exchanges. The agency said it needed more time to craft guidance tailored to the complex features of the platforms. Before the final DeFi rules came out, crypto users and tax professionals said it would be nearly impossible for the IRS to police the exchanges.

The Blockchain Association is hoping for more favorable treatment when President-elect Donald Trump takes office in January. Trump and some GOP allies have promised to be friendlier to the industry.

The Treasury Department didn’t immediately respond to a request for comment.

Judge Brantley Starr is assigned to the case.

Duane Morris LLP and Skadden, Arps, Slate, Meagher & Flom LLP represent the plaintiffs.

The case is Blockchain Ass’n v. IRS, N.D. Tex., No. 3:24-cv-03259, complaint 12/27/24.