The Internal Revenue Service (IRS) has recently announced a temporary relief measure that will benefit cryptocurrency holders using centralized finance (cefi) exchanges in 2025. This update comes in response to concerns surrounding the finalized Section 6045 custodial broker regulations, which are set to go into effect on January 1, 2025.
Under the new regulations, cryptocurrency holders on cefi exchanges would have been required to use the FIFO (First-In, First-Out) accounting method for digital asset sales, unless they had selected a preferred method such as Highest-In, First-Out (HIFO) or Specific Identification (Spec ID). However, many cefi brokers were not prepared to support Spec ID by the deadline, potentially leading to unintended tax consequences for crypto holders.
To address this issue, the IRS has granted temporary relief that allows taxpayers to continue using their own records or tax software to identify the specific units of cryptocurrency being sold. This means that crypto holders can still utilize their books and records to document which specific units they are selling when conducting transactions on cefi exchanges.
The relief period will be in effect from January 1, 2025, to December 31, 2025. During this time, taxpayers are advised to select an accounting method with their cefi exchange to avoid defaulting to FIFO after the relief period ends. It is crucial for taxpayers to ensure that their accounting method on the cefi exchange matches their crypto tax software to keep their tax lots in sync.
Importantly, taxpayers do not need to take any immediate action to qualify for this relief. The relief will be automatically applied to them, providing flexibility in reporting and tracking digital asset sales on cefi exchanges. However, it is recommended that taxpayers stay informed and make the necessary adjustments to comply with the regulations once the relief period ends.
Overall, the IRS’s temporary relief measure offers a solution for crypto holders on cefi exchanges, allowing them to navigate the complex landscape of tax regulations with greater ease and flexibility. By staying informed and taking proactive steps to align their accounting methods, cryptocurrency holders can ensure compliance and minimize potential tax liabilities in the future.