IRS Issues Temporary Relief on Crypto Cost-Basis Method Changes

Temporary Relief for Crypto Holders on Centralized Exchanges

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 move comes as a welcome reprieve for many in the crypto community, who had been bracing themselves for the potentially disastrous consequences of being locked into the First In, First Out (FIFO) method.

The Initial IRS Rulings

Initially, the IRS had stated that if investors holding crypto assets with a CeFi broker did not select their preferred accounting method, such as HIFO (Highest In, First Out) or Spec ID, the broker would default to reporting sales using the FIFO method. The FIFO method is the default method for calculating capital gains tax in the US and assumes that the oldest cryptocurrency bought is sold first, pushing up a taxpayer’s capital gains.

The Problems with FIFO

But as many experts have pointed out, FIFO can be a less-than-ideal accounting method, especially for crypto holders who are not aware of its implications. By defaulting to FIFO, brokers would be assuming that investors want to sell their oldest assets first, which may not always be the case. In fact, this could lead to unintentionally maximizing capital gains, as Mark Thomas, a crypto commentator, explained in his January 1 Xpost.

The Benefits of Other Accounting Methods

Other accounting methods, such as HIFO and Spec ID, allow investors to choose how they want to report their sales. For example, HIFO allows investors to sell the highest-priced assets first, while Spec ID allows them to assign a specific identification number to each asset, making it easier to track gains and losses.

The Temporary Relief

In response to concerns from the crypto community, the IRS has issued a temporary relief that applies to sales on centralized crypto exchanges until December 31, 2025. This will give brokers time to support all accounting methods, allowing investors to maintain their own records until then. Shehan Chandrasekera, head of tax at Cointracker, welcomed this move in his December 31 Xpost, saying "You won’t have to be locked into FIFO as before."

The Blockchain Association Takes Legal Action

The update comes just days after the Blockchain Association and the Texas Blockchain Council filed a lawsuit against the IRS on December 28. They argue that the rules requiring brokers to report digital asset transactions and expanding existing requirements to include platforms like decentralized exchanges (DEXs) are unconstitutional.

What This Means for Crypto Taxpayers

For crypto taxpayers, this temporary relief is a welcome respite from the potential headaches of being locked into FIFO. But it’s essential to remember that once the rules take effect in 2027, brokers will be required to disclose information about taxpayers involved in digital asset transactions and report their gross proceeds from crypto and other digital asset sales.

The Future of Crypto Regulations

As the crypto market continues to evolve, regulatory bodies like the IRS are facing increasing pressure to create rules that balance the need for tax revenue with the need to protect investors. The lawsuit filed by the Blockchain Association highlights the complexities involved in regulating this rapidly changing landscape.

The Impact on Crypto Holders

For many crypto holders, the prospect of being locked into FIFO was a daunting one. By defaulting to FIFO, brokers would be assuming that investors want to sell their oldest assets first, which may not always be the case. As Mark Thomas pointed out in his January 1 Xpost, "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 scenario, FIFO would mean long-term capital gains instead of short-term.

The Importance of Record Keeping

As the IRS continues to issue guidance on crypto regulations, it’s essential for investors to maintain accurate records of their crypto transactions. This will allow them to take advantage of the temporary relief and avoid any potential tax implications down the line.

Conclusion

In conclusion, the temporary relief issued by the IRS is a welcome move for many in the crypto community. By giving brokers time to support all accounting methods, investors can maintain their own records until December 31, 2025. While the future of crypto regulations remains uncertain, one thing is clear: it’s essential for regulatory bodies like the IRS to work closely with industry stakeholders to create rules that balance the need for tax revenue with the need to protect investors.

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