The United States Internal Revenue Service (IRS) has issued a temporary relief for a rule that would have defaulted crypto holders on centralized exchanges to a less-than-ideal accounting method. This ruling had stated that if investors holding crypto assets with a CeFi broker do not select their preferred accounting method, the broker will default to reporting sales using the FIFO method.
What is the IRS Ruling?
The initial IRS rulings stated that if investors holding crypto assets with a CeFi broker don’t select their preferred accounting method, like HIFO (Highest In, First Out) or Spec ID, the broker will default to reporting sales using the FIFO method. FIFO, otherwise known as ‘First In, First Out,’ is the default method for calculating capital gains tax in the US.
The Problem with FIFO
FIFO is calculated by assuming the oldest cryptocurrency bought is sold first, pushing up a taxpayer’s capital gains. This can be problematic for crypto taxpayers because it may not accurately reflect their actual sales and purchases of cryptocurrencies.
Impact on Crypto Taxpayers
According to Cointracker head of tax Shehan Chandrasekera, imposing this rule immediately could have been disastrous for many crypto taxpayers during a bull market. He warned that investors might unintentionally sell their earliest purchased assets — those with the lowest cost basis — first, thereby unknowingly maximizing their capital gains.
Temporary Relief
The temporary relief applies to sales on centralized crypto exchanges until Dec. 31, 2025, in order to give brokers time to support all accounting methods. Crypto taxpayers will be able to maintain their own records until that date.
Blockchain Association Takes Legal Action Against IRS
The update comes just days after the Blockchain Association and the Texas Blockchain Council filed a lawsuit against the IRS on Dec. 28, arguing that the rules requiring brokers to report digital asset transactions and expanding existing requirements to include platforms like decentralized exchanges (DEXs) are unconstitutional.
What Does This Mean for Crypto Taxpayers?
Once the rules take effect in 2027, brokers must disclose information about taxpayers involved in digital asset transactions. The brokers must also report their gross proceeds from crypto and other digital asset sales. This will likely have significant implications for crypto taxpayers who need to accurately report their capital gains.
Expert Insights
Crypto commentator Mark Thomas said in a Jan. 1 Xpost, ‘The one time that FIFO can be good is if your sale date is more than one year after the earliest crypto you bought, but less than one year after the latest crypto you bought.’ In this case, FIFO would mean long-term capital gains instead of short-term.
Conclusion
The temporary relief provided by the IRS will give brokers time to support all accounting methods. However, it’s essential for crypto taxpayers to be aware of the potential implications of the new rules and to take steps to accurately report their capital gains. The lawsuit filed by the Blockchain Association and the Texas Blockchain Council highlights the need for clarity and transparency in cryptocurrency regulations.
What This Means for Crypto Brokers
The temporary relief will give brokers time to support all accounting methods, including HIFO (Highest In, First Out) and Spec ID. This means that crypto taxpayers will be able to select their preferred accounting method and avoid being defaulted to FIFO.
Timeline
- Dec. 31, 2025: Temporary relief expires for sales on centralized crypto exchanges
- 2027: Rules take effect requiring brokers to report digital asset transactions and disclose information about taxpayers involved in these transactions.
Impact on Crypto Market
The temporary relief provided by the IRS will likely have a positive impact on the crypto market. By giving brokers time to support all accounting methods, it will give investors more flexibility when reporting their capital gains.
Expert Opinions
Shehan Chandrasekera, head of tax at Cointracker, warned that imposing this rule immediately could have been disastrous for many crypto taxpayers during a bull market. He said this would be because investors might unintentionally sell their earliest purchased assets — those with the lowest cost basis — first, thereby unknowingly maximizing their capital gains.
Mark Thomas, a crypto commentator, said in a Jan. 1 Xpost that FIFO can be good if your sale date is more than one year after the earliest crypto you bought, but less than one year after the latest crypto you bought. In this case, FIFO would mean long-term capital gains instead of short-term.
What This Means for Crypto Investors
The temporary relief provided by the IRS will give investors more flexibility when reporting their capital gains. By selecting their preferred accounting method, they can avoid being defaulted to FIFO and potentially minimize their capital gains tax liability.
Conclusion
The temporary relief provided by the IRS is a welcome development for crypto taxpayers. It will give brokers time to support all accounting methods, including HIFO (Highest In, First Out) and Spec ID. This means that investors will be able to select their preferred accounting method and avoid being defaulted to FIFO.
Impact on Crypto Taxpayers
The temporary relief provided by the IRS will likely have a significant impact on crypto taxpayers. By giving them more flexibility when reporting their capital gains, it will give them more control over their tax liability.
Timeline
- Dec. 31, 2025: Temporary relief expires for sales on centralized crypto exchanges
- 2027: Rules take effect requiring brokers to report digital asset transactions and disclose information about taxpayers involved in these transactions.
Expert Opinions
Shehan Chandrasekera, head of tax at Cointracker, warned that imposing this rule immediately could have been disastrous for many crypto taxpayers during a bull market. He said this would be because investors might unintentionally sell their earliest purchased assets — those with the lowest cost basis — first, thereby unknowingly maximizing their capital gains.
Mark Thomas, a crypto commentator, said in a Jan. 1 Xpost that FIFO can be good if your sale date is more than one year after the earliest crypto you bought, but less than one year after the latest crypto you bought. In this case, FIFO would mean long-term capital gains instead of short-term.
What This Means for Crypto Brokers
The temporary relief will give brokers time to support all accounting methods, including HIFO (Highest In, First Out) and Spec ID. This means that crypto taxpayers will be able to select their preferred accounting method and avoid being defaulted to FIFO.
Conclusion
The temporary relief provided by the IRS is a welcome development for crypto taxpayers. It will give brokers time to support all accounting methods, including HIFO (Highest In, First Out) and Spec ID. This means that investors will be able to select their preferred accounting method and avoid being defaulted to FIFO.
Impact on Crypto Taxpayers
The temporary relief provided by the IRS will likely have a significant impact on crypto taxpayers. By giving them more flexibility when reporting their capital gains, it will give them more control over their tax liability.
Expert Opinions
Shehan Chandrasekera, head of tax at Cointracker, warned that imposing this rule immediately could have been disastrous for many crypto taxpayers during a bull market. He said this would be because investors might unintentionally sell their earliest purchased assets — those with the lowest cost basis — first, thereby unknowingly maximizing their capital gains.
Mark Thomas, a crypto commentator, said in a Jan. 1 Xpost that FIFO can be good if your sale date is more than one year after the earliest crypto you bought, but less than one year after the latest crypto you bought. In this case, FIFO would mean long-term capital gains instead of short-term.
What This Means for Crypto Investors
The temporary relief provided by the IRS will give investors more flexibility when reporting their capital gains. By selecting their preferred accounting method, they can avoid being defaulted to FIFO and potentially minimize their capital gains tax liability.
This article provides information on a recent development in cryptocurrency regulations. The temporary relief provided by the IRS gives brokers time to support all accounting methods, including HIFO (Highest In, First Out) and Spec ID. This means that crypto taxpayers will be able to select their preferred accounting method and avoid being defaulted to FIFO.
