A leading tax practitioner declared that the federal income tax system is in the worst shape he has seen in 50 years of practice.[1] His diagnosis points to failures across Congress, the courts, and the IRS. For business leaders invested in digital assets, his analysis may explain why the crypto tax regime remains in a muddle and may offer a path to clarity.
Congressional Whiplash
When Congress included crypto broker reporting rules in the 2021 Infrastructure Investment and Jobs Act (the “Infrastructure Act”), the language was so vague that it could be read to apply to decentralized finance (DeFi) platforms. The Treasury Department did just this in late 2024 and issued Treasury Regulations imposing the broker requirement on DeFi platforms — a move heavily criticized by the crypto industry and lawmakers. These regulations were viewed as a death sentence for these protocols since the DeFi ecosystem/architecture, which lacks centralized intermediaries, could not comply with the data collection requirements. With bipartisan support in both chambers, Congress repealed these DeFi regulations in early 2025, but that repeal now blocks the issuance of any similar regulation unless Congress passes entirely new legislation. This creates a potential blind spot for the IRS, where taxes may be owed, but the government has no direct mechanism to track compliance.
The takeaway for the crypto industry is straightforward. Until Congress writes legislation that reflects how crypto platforms operate — rather than forcing them into frameworks designed for traditional finance — regulatory uncertainty will continue.
Uncertainty in the Courts
In 2024, the Supreme Court’s Loper Bright [2] decision stripped away “Chevron deference,” which was a longstanding rule requiring courts to defer to a federal agency’s interpretation of “silent or ambiguous” statutes. Since the IRS has implemented most of its crypto tax positions based on its own published guidance rather than legislation, those positions (e.g., classifying crypto as property (now codified in the Infrastructure Act), taxing staking rewards on receipt, and determining cost basis methods), to the extent not codified in legislation, are now far more vulnerable to legal challenges.
The potential problem is that different federal courts could reach different conclusions on the same crypto tax question. One federal circuit might agree with the IRS and rule that staking rewards are taxable when received; a court in a different federal circuit might hold staking rewards are not taxable until sold. That kind of “circuit split,” absent intervention by the Supreme Court of the United States, creates uncertainty for businesses operating nationally and opens the door to forum shopping.
IRS Lacks Resources
Even where rules are in place, the IRS may lack sufficient resources to enforce these rules. For example, the IRS has rolled out IRS Form 1099-DA reporting for crypto brokers, but the reporting process still has material gaps — brokers cannot track cost basis for digital assets transferred in from other platforms and DeFi protocols are not required to file an IRS Form 1099-DA. Compounding this, more than 170 IRS attorneys withdrew from Tax Court cases in 2025 alone. The expertise and manpower needed to audit complex blockchain transactions is disappearing just as the need for it grows.
While at first glance exemption from the reporting requirements and a lack of manpower may seem a boon to crypto investors, the IRS’s increasing use of technological advances, including artificial intelligence, to bridge the gap could lead to surprise audits. Crypto investors that fail to self-report income from their crypto investments should be aware that the IRS has at least a three-year window (six years in some instances) to collect.
What Needs to Happen
Congress must draft precise statutes that address crypto’s unique architecture, codify fundamental tax treatments (staking, token swaps, DeFi lending) rather than leaving them to agency guidance, and fund the IRS with the staff and technology to enforce the rules. There are encouraging signals — White House recommendations on crypto reporting, congressional hearings on a modern digital asset framework, and international coordination through the OECD. But without institutional follow-through, these efforts risk repeating the same cycle of vague laws, overreaching regulations, and legal challenges. For business leaders in the digital asset space, the message is clear: the rules are still being written, the enforcers lack resources, and courts may second-guess whatever emerges. Advocating for legislation that removes this uncertainty is not optional — it is essential.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Every business situation is unique; please consult with your own tax professional.
[1] Michael L. Schler, “The State of the Federal Income Tax System: Poor,” Tax Notes Federal, Jun. 2, 2025, p. 1643.
[2] Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024).