The Internal Revenue Service (IRS) has recently provided temporary relief on crypto cost-basis reporting rules, potentially preventing digital asset investors from facing increased tax liabilities. This decision comes as a response to the complexities of crypto taxation and the need for regulatory flexibility in light of the ever-evolving markets.
The relief granted by the IRS involves postponing the implementation of a rule that would have required centralized crypto exchanges to default to the First In, First Out (FIFO) accounting method for calculating capital gains. FIFO typically assumes that the oldest assets are sold first, which can result in higher taxable gains, especially during market upswings. This extension will be in effect until December 31, 2025, giving brokers additional time to adjust to different accounting methods.
Investors had expressed concerns about potentially inflated tax bills under the FIFO method, as it could force the sale of assets acquired at lower prices, leading to higher gains and increased taxes. Shehan Chandrasekera, Cointracker’s head of tax, warned that the immediate application of FIFO could disproportionately impact crypto taxpayers, potentially resulting in significant tax burdens.
During this relief period, taxpayers have the option to choose alternative accounting methods such as Highest In, First Out (HIFO) or Specific Identification (Spec ID). These alternatives empower investors to select which assets to sell, providing flexibility and potentially reducing their tax exposure.
The IRS’s announcement comes at a time when there is increased scrutiny and legal challenges surrounding the agency’s approach to digital asset taxation. The Blockchain Association and the Texas Blockchain Council recently filed a lawsuit contesting the IRS’s expanded reporting requirements, particularly the mandate for brokers to report all digital asset transactions, including those on decentralized exchanges (DEXs). Critics argue that these regulations exceed the IRS’s authority and place undue burdens on market participants.
The temporary relief granted by the IRS demonstrates an understanding of the volatile nature of the crypto markets and the diverse strategies employed by investors. Many observers see this decision as a necessary step towards finding a balance between regulatory oversight and the operational realities of the crypto industry.
Market participants widely welcome this delay as a positive development, as it allows more time for industry adaptation and compliance. Overall, the IRS’s temporary relief on crypto cost-basis reporting rules provides a much-needed breathing space for investors and brokers to adjust to the evolving landscape of digital asset taxation.