1. Quick review of the key points of the new regulations

On December 30, 2024, the IRS, a subsidiary of the U.S. Treasury Department, announced the "Gross Proceeds Reporting by Brokers That Regularly Provide Services Effective Digital Asset Sales", which final provisions and explanations for the tax reporting obligations of crypto asset sales and trading brokers (hereinafter referred to as "crypto asset brokers"). The so-called crypto asset broker, according to the new regulations, refers to "any person (as consideration) who is responsible for providing any service regularly to transfer digital assets on behalf of others" (in the United States, the concept of digital assets is equivalent to cryptocurrency), and needs to submit tax information returns like other types of brokers. The focus of this new regulation is that it also regards DeFi front-end platforms as crypto asset brokers and mandates these platforms to fully report users’ tax details.

1.1 Broker scope

1.1.1 Entities considered as brokers

(1) Centralized exchange

(2) Decentralized exchange

(3) Wallet with trading functions: This refers to a wallet that allows users to purchase, sell, and trade crypto assets directly on their platform, such as Phantom.

(4) Crypto Assets ATMs and trading booths: including Bitcoin ATMs and other forms of crypto Assets trading terminals.

1.1.2 Entities that are not considered brokers

(1) Blockchain maintainers: including miners, node operators, etc. They only participate in the maintenance of blockchain and do not directly involve transactions, so they do not fall into the category of brokers.

(2) Non-trading hardware wallet: This type of wallet needs to be connected to other exchanges to complete the transaction. Its service provider does not directly participate in the transaction process, so it is not considered a broker.

(3) Developers who indirectly promote trading: They develop software for platforms such as exchanges, but do not directly participate in trading activities, and therefore do not fall into the category of brokers.

(4) Smart contract developers: They earn income from smart contracts but are not responsible for their subsequent maintenance and updates, so they are not considered brokers.

1.2 Reasons for the regulatory end of the DeFi front-end

DeFi service providers use distributed ledger technology to provide investment and other financial services, similar to services provided by securities brokers and exchanges in the securities industry, enabling customers to trade crypto assets using applications. According to IRS According to the regulations, "trading front-end services" covers the following core functions: first, it is to receive transaction orders submitted by users; second, through an intuitive user interface, such as a graphical or voice interface, it is convenient for users to enter detailed transaction information; finally, these transaction information are accurately transmitted to the distributed ledger network to ensure that transactions can be executed smoothly on the blockchain. It is worth noting that even if the DeFi front-end does not directly store the user's funds or private keys, it still plays an indispensable role in the initiation and execution of transactions. The reason why the IRS believes that the DeFi front-end is a broker that should report tax information is because the DeFi front-end platform plays the role of a sales and transaction broker specified in 26 CFR § 1.6045. In addition, the IRS also clearly pointed out that the additional intermediate links in the transaction process, such as the use of DeFi aggregators, will not change the identity of the DeFi front-end as a broker.

1.3 Obligations of crypto asset brokers

The obligations of crypto asset brokers mainly include the following aspects:

1.3.1 Tax reporting obligations

According to the new regulations, crypto asset brokers, including the DeFi front-end, must use the 1099-DA form specified by the IRS to report in detail to the client and the IRS in the form of a third-party report. The content to be filled in this form includes:

(1) Digital Asset Broker Identification (TIN)

To protect the privacy of taxpayers, only the last four digits of the TIN, (Social Security Number (SSN), Personal Taxpayer Identification Number (ITIN), Personal Tax Release Identification Number (ATIN), or Employer Identification Number (EIN) are displayed in the 1099-DA.

(2) CUSIP Number

(3) Digital Asset Code, Name of Digital Asset

(4) Number of units of digital assets sold, exchanged, or otherwise disposed of in transactions

(5) Trading time

(6) Total transaction income

(7) Cost basis for digital assets sold, exchanged or otherwise disposed of

(8) Accrued market discount amounts of digital assets

(9) Amount of non-deductible losses in laundering transactions involving digital assets (if these assets are considered stocks or securities for tax purposes)

(10) Backup withholding tax

(9) Amount of non-deductible losses in laundering transactions involving digital assets (if these assets are considered stocks or securities for tax purposes)

(10) Backup withholding tax

If the taxpayer does not provide the correct TIN, or does not declare interest or dividend income, he may need to pay backed up withholding tax.

(11) Short-term capital gains and losses and long-term capital gains and losses

(12) Non-cash income

This refers to non-cash income such as goods and services obtained in transactions.

(13) State/local income tax information

1.3.2 Compliance obligations

style="text-align: left;">(1) Follow KYC

In order to meet strict reporting standards, brokers must fullyPerform KYC (Know Your Customers). This includes collecting, verifying and recording of customer identity information to ensure legitimacy and transparency of transactions.

(2) Comply with anti-money laundering and anti-terrorism financing regulations

Brokers, as important participants in the financial market, are obliged to monitor and report suspicious transactions to assist in anti-money laundering and anti-terrorism financing efforts. This requires brokers to have a complete transaction monitoring system and reporting mechanism to promptly detect and block potential illegal activities.

1.3.3 Trading security and protection obligations

(1) Protect the security of customer assets

Although the broker may not directly hold customer funds or private keys, the broker still needs to ensure the security of the transaction process to prevent loss of customer assets. This includes taking necessary technical measures and security management measures, such as encryption technology, firewalls, etc. to prevent hacker attacks and data breaches.

(2) Provide transaction guarantee

Brokers should provide transaction guarantee measures, such as transaction confirmation, rollback after transaction failure, etc. to ensure the accuracy and reliability of transactions.

In the event of a dispute in a transaction, the broker should actively assist in resolving it and provide the necessary support and assistance to the client.

2. Why is the DeFi ecosystem affected by the new regulations

The IRS (IRS) has expanded the scope of "crypto asset brokers" to entities and infrastructure such as DeFi front-end service providers, and has direct contact with an important part of the DeFi ecosystem. Specific constrained project types include:

2.1 DeFi front-end services (DEX and aggregators)

Head DEX and aggregators may be considered "brokers" if they provide user interaction interfaces. For example, for transaction aggregators such as 1inch and Jupiter, its front end needs to record the user's wallet address, transaction amount and asset type, and generate a 1099-DA form.

2.2 Hosting wallet provider

Unmanaged wallets (such as Phantom) may be temporarily exempted if they only provide interfaces but do not control the private key, but this ambiguity in itself means risks.

2.3 Privacy Transaction Agreements

Privacy Transaction Agreements used by the DeFi ecosystem may also be included in the scope of regulation. These protocols provide anonymous transactions through privacy technologies such as zero-knowledge proofs, but new IRS regulations require all front-end service providers participating in transactions to conduct tax reporting. This means that front-end service providers of privacy agreements may need to find a balance between privacy protection and compliance reporting.

2.4 Payment Processors

In general, if the new regulations are not ultimately overturned, or more than 60% of the top DeFi projects face direct constraints due to providing front-end services, the rest of the projects may be indirectly affected if they involve user transaction behavior. Even if these platforms do not hold users' assets, as long as they provide core services such as transaction matching and order execution, they must comply with the IRS's reporting requirements and report the detailed information of each transaction to the IRS, including transaction type, amount, transaction date and user's identity information (such as wallet address).

3. Compliance regulatory trends in the United States for crypto companies

In recent years, the United States has continued to make efforts in compliance issues in the crypto industry, and has issued a series of new regulations, investigated and litigated related companies, and imposed severe penalties to try to maintain market stability and protect investors' rights and interests. In terms of the new regulations, in addition to this new regulations, IRS has previously announced that it will implement a third-party reporting system for cryptocurrency transactions from 2025. Centralized trading platforms such as Coinbase and Gemini will need to report users' cryptocurrency transaction information to the tax department for the first time. In terms of investigation, punishment and litigation, CFTC, SEC and DOJ have also made frequent moves in recent years. The following table summarizes more famous cases in recent years, which objectively reflects the United States' emphasis on compliance issues.

4. Potential Impact of DeFi Economy

4.1 Compliance Costs Rises

4.1.1 Technical cost

If a high throughput off-chain data tracking system for public chains is planned to meet its high TPS (trading volume per second) needs, the system will obtain on-chain transaction data in real time through the API and process and store the data. Data will be stored in high-performance databases to ensure their security and reliability while being bound to user identities for accurate data management and analysis. The budget for such projects is estimated to be between $150,000 and $600,000. The development team will consist of 3 to 5 developers, 1 architect and 1 operation and maintenance staff. The team’s labor costs are expected to range between $90,000 and $450,000 depending on staffing and project complexity. In addition, the project also needs to invest in infrastructure such as cloud services, encryption technology, and security compliance, which is expected to increase one-time security costs of $20,000 to $50,000. At the same time, the operation and maintenance costs after the system is launched are expected to be between 10,000 and 30,000 US dollars per month, mainly used for server maintenance, data backup and security monitoring.

4.1.2 Legal Cost

Based on the hourly salary of US lawyers (approximately US$500/hour) and the legal consultation needs of DeFi projects, we can estimate the time and cost of legal consultation within one year. The specific analysis is as follows:

Regulations interpretation and compliance planning: It is expected to take 800-120 hours, and the cost is 40,000 to 60,000 US dollars.

Continuous Legal Consultation and Document Update: 30-50 hours a quarter, 1.2-200 hours a year, and the cost is $60,000-100,000.

User compliance review and document updates: 15-30 hours per month, 1.8-360 hours a year, and the cost is $18,000-36,000.

In summary, the total legal consultation time within one year is between 380-680 hours, calculated at US$500/hour, and the total cost range is between 190,000 and US$340,000. The ultimate cost depends mainly on the difference in project complexity and specific workload. If the project is more complex, the legal consultation fee may be close to $340,000.

4.1.3 Operating Cost

User KYC process integration can lead to a significant increase in operating costs. KYC integration incurs the following fees:

Third-party authentication service fees: Most DeFi projects choose to work with third-party authentication service providers (such as Onfido, Jumio, Trulioo, etc.). These service providers usually charge for user verifications, taking the Jumio KYX platform as an example, costs range from $1 to $5 per verification, depending on the type of verification and pricing of the service provider. For example, for the combination of authentication and address verification, a single verification may require $3-$7.

API integration fee: Integrating KYC processes into existing platforms requires the support of developers, involving docking with third-party APIs, which may require API usage fees, technical support fees, etc. These fees vary from platform to platform and may be several thousand dollars per month.

Manual review cost: Although many KYC processes can be automated, they still require manual review of certain high-risk or complex user verifications, especially for users with doubts. The cost of manual review is high, usually $50-$200 per hour, which may require thousands to tens of thousands per month.

So, suppose a DeFi project performs 100,000 KYC verifications per year, at 5 per time The cost of verification alone may be $500,000. Together with the cost of technology integration, compliance consultation and data storage, the annual cost of the entire KYC process may reach hundreds of thousands or even millions of dollars, depending on the size of the project, compliance requirements and number of users.

4.2 Decreased user activity

4.2.1 KYC resistance

Decentralization and anonymization are the core features of the crypto industry, and mandatory KYC will directly increase the complexity of on-chain interactions, trigger users' concerns about personal privacy, which may lead users to turn to the privacy chain or reduce participation in the crypto industry.

4.2.2 Reduced liquidity

Tightening of regulation will causeThe liquidity tension in the crypto market is the result of the combined effect of subjective sentiment and objective risks in the market. At the same time, the reduction in liquidity may also lead to a decline in transaction depth and an increase in slippage, further affecting the user's trading experience and leading to more capital outflows. This will not only cause transaction volume and revenue losses to the project parties on the chain, but will also affect the market competitiveness and sustainable operation capabilities of the entire public chain.

5. What FinTax can do for the DeFi ecosystem?

FinTax focuses on Web3 finance and provides automated and professional crypto asset financial management services to serve global customers and global customers, including listed companies and top digital currency operators. Meanwhile, the FinTax platform has been officially recognized by TON, MetaMask and TG. The FinTax team is distributed in North America, Hong Kong, Singapore, Europe and other places. It has a broad international perspective and rich experience. It can tailor comprehensive fiscal and tax solutions for customers based on the actual situation of different jurisdictions.

In response to the challenges of the new tax regulations of crypto asset brokers, FinTax can provide the following services to the DeFi ecosystem:

(1) Intelligent tax analysis based on user wallet address: By analyzing the user's wallet address, identifying the tax scenarios involved, and helping users understand the tax liability that may be caused by their crypto asset transactions.

(2) Tax calculation and report based on user wallet address: Automatically calculate the taxable amount based on user's wallet transaction records, and generate tax returns that meet the requirements of relevant tax jurisdictions to simplify user's tax declaration process.