The Blockchain Association challenges the Internal Revenue Service (IRS), claiming its guidelines concerning taxation on decentralized finance (DeFi) earnings are ‘unlawfully vague’.
The United States-based Blockchain Association has rallied against the Internal Revenue Service (IRS) over taxing decentralized finance (DeFi) transactions, stating that the current taxation guidelines are “unlawfully vague”.
The Association’s Challenge Against IRS
Filing a lawsuit on December 29, 2020, within the United States Court of Appeals for the District of Columbia Circuit, the lobbying group started legal proceedings against the IRS. They issued a petition stating that the guidance either did not, or could not define ‘clearly gross income’ arising from transactions of a ‘distribute, sell or exchange’ nature.
The lobbying association, representing various stakeholders in the blockchain industry, claims that the IRS’ taxation rules for cryptocurrencies are ‘unlawfully vague and violate the Administrative Procedure Act.’
IRS Regulation on Cryptocurrency
The IRS, on the other hand, has been trying to tighten its control over cryptocurrency tax compliance recently. It defines virtual currency as any digital representation of value that acts as a medium of exchange, a unit of account, and/or a store of value. The IRS states that, in practice, it is a currency that operates like a traditional currency but does not have all the attributes, such as legal tender.
The IRS published guidelines on cryptocurrency taxation in October 2019, which stated that digital currency is treated as property for tax purposes. As a result, general tax principles applicable to property transactions apply to transactions using virtual currency.
The Context of DeFi
Decentralized finance, or DeFi, is a term that covers financial services on blockchain that are open, permissionless, and decentralized. DeFi is revolutionary in offering services such as borrowing, lending, and trading on blockchain with the primary benefit being that it doesn’t need intermediaries, such as banks.
However, with DeFi’s growing popularity, it has also caught the attention of regulatory bodies. They express concern that the lack of regulation could lead to risk and instability in the financial market. The IRS’s attention towards DeFi proves that regulatory bodies are looking at it closely and attempting to gain more control over the market.
Possible implications
If the Blockchain Association’s lawsuit against the IRS is successful, it may lead to a reevaluation of how regulatory bodies approach and regulate DeFi and other cryptocurrency transactions. On the other hand, if the lawsuit fails, it could affirm the IRS’s power to tax DeFi transactions and set a precedent for how governments worldwide could tax DeFi and cryptocurrencies.
Regardless of the outcome of this lawsuit, it stresses the need for clear regulatory guidance when it comes to the taxation of cryptocurrencies, especially in the rapidly evolving DeFi sector. Without clear rules, the ambiguity may hamper the growth and adoption of blockchain and cryptocurrency technologies.
