The IRS Broker Rule and its Impact on Cryptocurrency

The IRS has finalized a highly anticipated regulation known as the Broker Rule. The rule mandates all cryptocurrency exchanges – custodial and non-custodial, fiat to crypto and crypto to crypto – to subject their users to Know-Your-Customer (KYC) measures. This rule is significant as it means that one does not need to have custody over funds to be deemed a broker by the IRS.

Defining Control in the Broker Rule

The Broker Rule defines ‚control‘ as the ability to amend, update, or otherwise substantively affect the terms under which the services are provided. This definition leads to an expanded interpretation of who can be considered a broker, which has led to pushback from the industry.

Resistance Against the Broker Rule

Shortly after the rule’s publication, the Blockchain Association filed a lawsuit against the IRS and the Treasury Department. The association argues that the rule is unconstitutional and contrary to existing federal laws. Additionally, several senators have co-sponsored a joint resolution to disapprove the rule.

What Does This Mean for Cryptocurrency Users?

The Broker Rule is part of the Biden administration’s efforts to extend control over non-custodial services. If upheld, the rule could have significant implications for cryptocurrency users and developers alike. There is a possibility of the rule being overturned, but the outcome remains uncertain.

Legislation for Protecting Developers

In response to the Broker Rule, the Blockchain Regulatory Certainty Act has been introduced to Congress. This act aims to provide widespread protections for developers, affirming that non-custodial service providers are exempt from being classified as money service businesses.