IRS Expands Crypto Oversight With Broker Rule

In the final days of the Biden administration, the IRS quietly pushed through its Broker Rule, a sweeping regulation requiring all cryptocurrency exchanges—whether custodial or non-custodial—to comply with Know-Your-Customer (KYC) requirements.

This new mandate expands the definition of a broker beyond traditional financial intermediaries, forcing DeFi front-end developers to report user transactions via 1099 tax forms. Under the rule, anyone involved in building “screens, buttons, forms, and other UI elements” that facilitate crypto trading could be classified as a broker, even without custody over funds.

DeFi Developers Under Scrutiny

The IRS asserts that developers exercising any degree of “control” over their services—such as modifying platform terms, collecting fees, or confirming transactions—must comply with the rule. This interpretation aligns with Financial Action Task Force (FATF) guidelines, which treat front-end developers as Virtual Asset Service Providers (VASPs) subject to anti-money laundering (AML) and counter-terrorism financing (CFT) laws.

Critics argue that this overreach contradicts FinCEN’s past guidance, which has traditionally tied financial regulation to direct custody over user funds.

Industry Pushback and Legal Challenges

The crypto industry swiftly responded. Just a day after the rule’s release, the Blockchain Association filed a lawsuit against the IRS and the Treasury Department, arguing that the regulation is unconstitutional and exceeds federal authority.

Simultaneously, Senator Ted Cruz introduced a joint resolution in Congress to disapprove of the rule, co-sponsored by Senators Cynthia Lummis, Bill Hagerty, Mike Lee, and Tim Scott.

“This regulation undermines the purpose of DeFi technology: to enable individuals to freely buy, sell, and exchange digital assets,” said Cruz in a press release.

The resolution passed the Senate with overwhelming support (70-27) and now moves to the House for a final vote.

Biden’s Crackdown on Non-Custodial Services

The Broker Rule is part of a broader effort by the Biden administration to increase regulatory control over non-custodial crypto services. Similar arguments have been used in criminal cases against Samourai Wallet and Tornado Cash developers, where the Department of Justice claims that developers can be held liable for facilitating illicit transactions—even without custody over funds.

To counteract this trend, Representative Tom Emmer has introduced the Blockchain Regulatory Certainty Act, which aims to protect non-custodial service providers from being classified as money service businesses.

With the Broker Rule facing strong resistance in both courts and Congress, its fate remains uncertain. However, the ongoing prosecutions of crypto developers suggest that regulatory battles over DeFi and non-custodial services are far from over.