Does Decentralized Finance also need KYC? The IRS in the United States requires decentralized finance brokers to report user transaction data.

The Internal Revenue Service (IRS) of the United States has introduced new regulations requiring Decentralized Finance (DeFi) brokers to collect and report user transaction data, including total earnings from digital asset transactions. This measure aims to enhance tax compliance in the emerging field of Decentralized Finance.

According to the updated rules, Decentralized Finance brokers are required to provide customers with Form 1099-DA, which includes key details of transactions such as name, wallet address, and transaction amount. This puts Decentralized Finance service providers on an equal footing with traditional securities brokers in terms of tax reporting obligations, representing a significant change in regulatory oversight.

The broker responsible for recording the total revenue into the customer's wallet address or account is also responsible for reporting the transaction. This practice is in line with the existing securities broker framework, ensuring that each transaction only requires one broker to report, thus simplifying the reporting process and reducing potential errors.

Although the final regulations do not require reporting of transaction timestamps or wallet address information, brokers are still required to retain this data for seven years for IRS inspection. The new 1099-DA form will be used to report this information, providing taxpayers with the necessary details to accurately include the proceeds from digital asset transactions in their income.

The IRS has decided to implement these regulations, highlighting its commitment to improving tax Compliance in the rapidly evolving Decentralized Finance sector, where traditional financial norms are being challenged and redefined. The inclusion of non-custodial wallets (also known as cold wallets or self-custody wallets) in the definition of broker has long been a controversial issue, as it could broaden the scope of entities classified as brokers.

Finalized key points

Form 1099-DA: Brokers must use this form to report the proceeds from the disposition of digital assets, including cryptocurrencies, NFTs, and stablecoins.

Broker classification: Brokers need to specify their types, such as self-service terminal operator, digital asset payment processor, custodial wallet provider, non-custodial wallet provider, or other digital asset declarants.

Transaction data: Mandatory transaction data includes sales transaction ID (TxID), digital asset address, and sales unit number. Transfer-related data points include transfer-in TxID number, transfer-in digital asset address, and transfer-in unit number.

Data Retention: Brokers are obligated to retain trading data for seven years for IRS inspection.

Effective date: The regulations will take effect 60 days after publication in the Federal Register, with reporting expected to begin in January 2026.

Using Decentralized Finance platforms also requires KYC.

The new regulations from the IRS pose significant challenges to Decentralized Finance platforms, which typically operate in a highly decentralized and anonymous manner. The requirements of centralized reporting and KYC (Know Your Customer) practices may force certain segments of Decentralized Finance to either centralize or move overseas to escape compliance burdens. Nevertheless, with appropriate compliance strategies and a focus on privacy protection technology, Decentralized Finance platforms can still navigate this evolving regulatory environment while adhering to their core principles.

The IRS will align cryptocurrency tax reporting requirements with those of other assets, aiming to simplify and reduce the Compliance cost of taxpayers while helping to narrow the tax gap. As Deputy Assistant Secretary for Tax Policy Aviva Aron-Dine said, 'These regulations will ensure that all taxpayers operate under the same rules and have access to the information needed for accurate filing.'

<Decentralized Finance also needs KYC? The US Internal Revenue Service requires Decentralized Finance brokers to report user transaction data> This article was first published in Blockchained.