The Internal Revenue Service (IRS) has introduced a temporary relief for cryptocurrency holders who utilize centralized exchanges, easing the burden of an accounting mandate that many found problematic.
New Accounting Flexibility
Previously, the IRS required that cryptocurrency investors who didn’t explicitly select an accounting method—like Highest In, First Out (HIFO) or Specific Identification (Spec ID)—would have transactions automatically documented using the First In, First Out (FIFO) method.
This means that brokers would sell the oldest assets first.
As a result, this could lead to significantly higher capital gains taxes for many taxpayers when they sell their cryptocurrencies.
Shehan Chandrasekera, the tax head at Cointracker, highlighted that this recent ruling permits crypto investors to choose how they account for their transactions, moving away from the stricter FIFO requirement.
He pointed out that if this rule had been enforced earlier, a rising market could have forced many investors to unintentionally sell their oldest holdings—usually the least expensive—leading to maximized capital gains on their taxes without their realizing it.
Market Implications
Mark Thomas, a crypto analyst, noted that FIFO might be advantageous in certain scenarios.
For instance, if an investor sells their cryptocurrency more than a year after acquiring older assets but less than a year after their most recent purchase, FIFO could help them qualify for long-term capital gains treatment rather than paying higher short-term rates.
This temporary leniency will remain in effect for transactions on centralized exchanges until December 31, 2025.
This provides brokers with the necessary time to adopt various accounting methods.
Until then, cryptocurrency investors are encouraged to record their transactions independently.
Future Regulations
This announcement follows a lawsuit brought by the Blockchain Association and the Texas Blockchain Council on December 28, which contests the constitutionality of IRS rules requiring brokers to report digital asset transactions and enforce compliance for decentralized exchanges (DEXs).
Starting in 2027, new regulations will take effect, compelling brokers to disclose detailed information about taxpayers engaging in digital asset transactions, including their gross revenues from cryptocurrency sales.
Source: Cointelegraph
