Lawmakers voted to overturn a controversial tax rule that requires "custodial brokers" to collect and report user data to the Internal Revenue Service. The resolution will now head to the full House of Representatives for a vote. 

The U.S. House Ways and Means Committee voted 26-16 during a hearing on Wednesday to advance a resolution from Rep. Mike Carey, R-Ohio, to repeal the IRS rule that was finalized late last year. Carey said the rule would "overwhelm" the IRS with forms. 

"We must pass this resolution to avoid this nightmare for American taxpayers and for the IRS, while ensuring that the United States is in fact in a position to lead the world in innovation with digital assets and in the crypto sector," Carey said during the hearing. 

Carey introduced the legislative measure alongside Sen. Ted Cruz, R-Texas, last month following the Internal Revenue Service's move to finalize a rule that garnered criticism and lawsuits from the crypto industry. 

The IRS said in late December it will require "DeFi brokers" to act like traditional securities brokers who are required to collect information about their users' trades. Some "decentralized finance industry participants" will have to send their customers Form 1099 tax returns, which are used to report payments that typically aren't from an employer, like gambling winnings, rents and royalties.

The U.S. Treasury Department noted the finalized rule applies to "front-end service providers" that interact "directly with customers," which suggests entities that run the primary website used to access a decentralized protocol, rather than the protocol itself. The rule is expected to go into effect on or after Jan. 1, 2027.

Carey's resolution got some heat from Democrats who say Republicans are trying to weaken the IRS.

"They are the party that has consistently underfunded the IRS," said Rep. Richard Neal, D-Mass.

Next, the resolution will have a floor vote in the House of Representatives. 

“The DeFi Education Fund applauds the House Ways and Means Committee members who voted for moving the CRA to the House floor, recognizing the need to push back against unlawful and unconstitutional overreach by the Treasury and IRS and to protect  Americans' freedom of choice in how they transact," said Miller Whitehouse-Levine, CEO of the DeFi Education fund in a statement. "Members of the full House and Senate will now get to vote on the CRA."

Many crypto industry experts have criticized the expanded tax reporting requirements over privacy implications for crypto users and the practicality of the rule. Noncustodial crypto service providers, like Uniswap, serve different functions than traditional brokers — and it's not always clear who or what entity would be required to collect user information. 

For instance, DeFi brokers may have to record "the name and address of each customer," according to the rule. However, in some instances, there are no centralized service providers that interface directly with users — making it what some have called an "unsquarable circle."

The Blockchain Association and two other groups sued the IRS quickly after the rule was finalized and warned the requirements would "push this entire, burgeoning technology offshore." 

The resolution was introduced under the Congressional Review Act — a law enacted in 1996, which can be used by lawmakers to "overturn certain federal agency actions," according to the Congressional Research Service. 

The CRA was used last year in an attempt to overturn the U.S. Securities and Exchange Commission's Staff Accounting Bulletin 121, or SAB 121, and was later vetoed by President Joe Biden. That staff bulletin was later rescinded by the agency. 

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