DeFi Taxation? Uncovering Everything About the On-Chain Goblins' Vault
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DeFi Taxation? Uncovering Everything About the On-Chain Goblins' Vault
Mainly discusses under what conditions certain roles in DeFi may be deemed as "brokers."
Navigating Web3 tides with focused insightsAuthor: cmDeFi
Core Thesis: Understand under what circumstances DeFi may be classified as a "broker," explore the underlying logic and survival space between decentralization and regulatory attitudes, and identify the ideal exit strategy.
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Expanded broker definition: Regulations view DeFi transactions as highly similar to securities trading processes. A DeFi broker would need to submit information reports to the IRS, assist users in accurate tax reporting, and ensure compliance (KYC, anti-money laundering, etc.).
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Determining a DeFi broker: Entities that provide services facilitating transactions and have the ability to obtain user information.
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Impact on DeFi: Projects can choose to accept broker classification or pursue greater decentralization. The higher the degree of decentralization, the lower the likelihood of being classified as a broker.
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DeFi’s ideal future path: Decentralized frontends, non-upgradable contracts, on-chain governance, and functional tokenization to build its own network.
Research Report
1/4 · Background and Rationale
This regulation, initiated by the U.S. Department of the Treasury and the Internal Revenue Service (IRS), addresses challenges in tax oversight caused by the decentralized and anonymous nature of digital asset transactions, which often lack the transparency found in traditional financial systems. The regulation highlights structural similarities between securities markets and DeFi:
Order submission → Trade matching and execution → Trade settlement
In traditional securities markets, brokers transmit clients’ trade orders to centralized exchanges (e.g., NYSE or Nasdaq), where buy and sell orders are matched. In DeFi, regulators argue that a similar “broker” role exists—one that must report transaction data to the IRS, help users file taxes accurately, and ensure compliance (KYC, AML, etc.).
Thus, our focus is on identifying under what conditions certain DeFi roles may be deemed “brokers.” Regardless of whether this regulation is ultimately adopted or how it is implemented, our primary goal is to analyze the fundamental dynamics between decentralization and regulatory positioning—the logic, boundaries, and room for survival.
2/4 · Expanding the Definition of “Broker”
Traditionally, the term “broker” has been confined to intermediaries in securities markets who act as agents or hold client assets directly. This new regulation significantly broadens that definition to include digital asset participants. Under the proposal, brokers must file detailed transaction reports with the IRS—including gains and transaction specifics—to improve tax compliance, thereby increasing potential tax liabilities.
This reflects a clear regulatory intent: even though the approval of ETH ETFs has helped distinguish between “securities” and “commodities,” with qualifying digital assets leaning toward commodity status, this expanded “broker” framework aims to establish an information reporting mechanism akin to securities markets. Ultimately, this circles back to the foundational question—how should DeFi protocols and tokens be defined?
The regulation explicitly includes the following types of actors under the expanded broker definition:
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Digital asset intermediaries: Individuals or entities providing services to facilitate digital asset transactions, including exchanges and custodial wallet providers.
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DeFi platform participants: Non-custodial platforms that do not hold users’ private keys but offer trading services via protocols or smart contracts.
The key word here is “intermediary.” While traditional intermediaries like exchanges and custodians are uncontroversial, the real debate lies in defining intermediary roles within DeFi. Two critical factors emerge 🚩
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Providing services that facilitate transactions
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Having the ability to access user information
With these two criteria in mind, let's examine the various roles within a typical DeFi project:
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Frontend service providers: Offer user-friendly interfaces enabling interaction or trading.
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Protocol operators: Develop and maintain core protocols or smart contracts (e.g., Uniswap, Curve, and other AMMs).
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Validators or settlement layers: Record transactions on a distributed ledger (blockchain).
The regulation particularly focuses on frontend providers and protocol operators, as their services directly “facilitate” transactions. Validators or miners, however, who merely secure the network without actively promoting trades, are generally excluded from the broker designation. Therefore, we will only analyze the first two roles.
We’ll use Uniswap throughout this analysis as it uniquely embodies aspects of all scenarios.
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Frontend providers are largely uncontested—they clearly fall into the “intermediary” category. Especially in cases like Uniswap’s current model, where the frontend charges fees, this strengthens the case for broker classification.
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Protocol operators are more contentious. Strictly speaking, immutable, non-upgradable smart contracts are not controlled by any single entity. They operate permissionlessly and tamper-proof. So, should the developers or teams behind such protocols be considered brokers?
Revisiting the two key criteria: Facilitating transactions + Access to user information
Taking today’s Uniswap as an example: the team operates and maintains the frontend, fully enabling transaction facilitation—and even charging for it. Furthermore, they possess the technical capability to collect user data (e.g., through KYC integration or terms of service on the frontend).
Now consider a hypothetical scenario: if the Uniswap team completely stepped away—ceasing all maintenance and support—users could still interact directly with the deployed AMM smart contract. Once deployed, these contracts exist permanently on-chain. In such a state, the AMM becomes a truly decentralized tool. Without active control or data access, the project no longer meets the second criterion. Although the team originally deployed the contract, they lose both the ability and intent to actively facilitate trades or collect user data. Thus, regulators might find no identifiable “broker” subject to regulation.
Conclusion: The higher the degree of decentralization, the lower the likelihood of being classified as a broker.
To summarize, key characteristics of a truly decentralized project include:
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Self-executing smart contracts: Core functionality runs via blockchain-deployed smart contracts—immutable, permissionless, and open to all.
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No centralized control: Even if the founding team exits (e.g., stops maintaining the frontend), the protocol continues operating independently.
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Independent frontend layer: If the official interface (e.g., Uniswap.app) goes offline, third-party developers can create alternative frontends to interact with the same contracts.
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No access to user data: Due to trustless on-chain interactions, project teams typically cannot identify users or access private transaction details.
3/4 · Implications for DeFi
In DeFi’s early days, most projects aimed toward full decentralization—eventually transitioning governance to the community and achieving self-sustaining, on-chain operation. However, over time, it became evident that achieving this ideal is far more complex than anticipated. Many projects faded from relevance after their core teams departed, due to several reasons:
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Founding teams abandoning poorly maintained codebases under the guise of “decentralization”—a soft rug pull.
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Limited market understanding, requiring centralized guidance and momentum.
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Projects technically sound but immature, with communities lacking the capacity for autonomous governance and development.
(1) DeFi Requiring Centralized Participation
In this cycle, many ceDeFi (centralized-DeFi hybrid) projects have emerged. Since pure DeFi struggles to achieve its vision, integrating professional, compliant centralized entities seems pragmatic. In such models, these centralized actors are highly likely to be classified as “brokers.” If this regulation passes, such projects may be required to:
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Implement KYC procedures for users
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Introduce frontend or service fees to offset compliance costs
However, this also means such “brokers” can operate legally and transparently, albeit at the cost of increased operational overhead—necessitating revenue generation through user fees or other monetization strategies.
(2) DeFi Capable of Full Decentralization
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Decentralized frontends
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Immutable, non-upgradable smart contracts
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On-chain governance mechanisms
Projects fulfilling these criteria are unlikely to be classified as brokers. From this perspective, even if the regulation passes, its primary impact would fall on projects heavily reliant on centralized control—though these currently dominate the market. Long-term, however, such regulations may accelerate genuine decentralization, raising the bar for any centralized entities entering the space.
4/4 · The Path Forward for DeFi
Clear regulatory and compliance frameworks for DeFi are inevitable—it’s only a matter of time. A Trump administration, for instance, might expedite a more favorable environment, as market expectations lean toward lighter-touch regulation. Based on existing bills or draft legislation, we now explore the optimal path forward—an ideal exit—for DeFi projects navigating compliance.
(1) Broker Classification
This remains the central theme of our discussion. The choice is binary: either formalize operations as a regulated business—accepting broker status and complying with IRS reporting requirements—or progressively decentralize the project.
(2) Token Classification
With the approval of ETH spot ETFs and provisions in prior legislation like the FIT21 Act, clearer guidelines are emerging for distinguishing whether a token is a security or a commodity.
ETH is increasingly viewed as functional—its staking and governance features primarily serve network maintenance rather than delivering economic returns—thus leaning toward commodity classification.
By extension, DeFi protocols whose governance tokens emphasize profit-sharing or dividend-like benefits risk being classified as securities. Conversely, tokens focused on utility, technical upgrades, or network functionality are more likely to be treated as commodities.
Returning to Uniswap: How could it avoid broker classification while maximizing the chances of its token being seen as a commodity? Here’s the ideal exit strategy:
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Shut down the official frontend and remove fees; let third-party interfaces handle access, or educate users to interact directly with smart contracts.
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Launch its own chain and gradually evolve its token into an “Ether-like” asset—used for gas, governance, and network security—thereby reinforcing its status as a functional utility and avoiding securities designation.
Regardless of whether these regulations pass, DeFi projects committed to true decentralization will remain resilient. That said, there will always be projects requiring some level of centralized involvement—at least for now, and they represent the majority. These will face difficult choices and trade-offs. But this is part of the natural evolution. True decentralization is not achieved overnight.
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