US IRS Faces Legal Heat Over DeFi Tax Rules as Developers Slam Compliance Burden

The US IRS is under fire as DeFi Education Fund launches a lawsuit challenging its controversial DeFi broker tax rules, citing threats to innovation and heavy compliance burdens on developers.

DeFi Tax Rules Face Lawsuit for Alleged APA Violations

New tax regulations that target the DeFi protocol are allegedly in violation of the Administrative Procedure Act (APA), according to the lawsuit filed by the DeFi Education Fund. According to the Fund, the general public urged the US Internal Revenue Service (IRS) to shelve the proposed tax regulations during the rule's comment period.

The tax office, however, disregarded concerns that the regulations would impose an undue cost on the software development community. This rule "puts unlawful compliance burdens on software developers who build so-called ‘trading front-end services,'" according to the lawsuit.

Innovation and Developers Burdened by IRS Tax Rules

If passed, this rule, according to the DeFi Education Fund, will stifle innovation and put an undue burden on American entrepreneurs.

The new DeFi tax requires trading front-end service providers to keep user transaction records on file. Users are encouraged to fill out Form 1099 for tax reporting purposes, and companies will be required to submit the details upon request to the IRS.

Software developer ConsenSys's lawyer Bill Hughes has previously foretold that litigation will accompany this rulemaking from the regulation. Despite the increasing backing from community members, the outcome of the case is still uncertain.

Crypto Staking and Broader IRS Policies Under Fire

The larger cryptocurrency business has long criticized the US Internal Revenue Service (IRS) for some of its demands, including the DeFi broker tax regulations. Crypto staking is now considered taxable income by the authority, according to earlier reports from Coingape. Industry insider Joshua Jarrett revealed this in a lawsuit brought against the agency.

These aren't the only privacy issues that the Digital Chamber has brought to light about the agency's tax policy. In general, experts agree that the regulator is making every effort to solidify its beliefs before the incoming administration takes control.

Now that the US IRS is embroiled in important cases, everyone is waiting to see if Treasury Sec candidate Scott Bessent will overturn these restrictions.