IRS Grants Temporary Relief on Crypto Tax Rules

The United States Internal Revenue Service (IRS) has granted temporary relief from a new rule that would have automatically assigned a less favorable accounting method to crypto holders on centralized exchanges.

The IRS initially stated that if cryptocurrency investors using Centralized Finance (CeFi) brokers do not choose an accounting method such as HIFO (Highest In, First Out) or Spec ID, the broker will automatically use the FIFO (First In, First Out) method for reporting sales.

In the U.S., the standard method for determining capital gains tax is FIFO. This method assumes that the earliest purchased cryptocurrency is sold first, which can result in higher capital gains for taxpayers.

The temporary relief granted by the IRS allows crypto holders to avoid automatically defaulting to the FIFO method. The relief delays the implementation of the default method until at least December 31, 2025, giving crypto investors and brokers more time to prepare and adopt alternative accounting methods.

In a December 31 post on X, Shehan Chandrasekera, Head of Tax at Cointracker, expressed concerns about the new rule, noting that in a bull market, it could have been problematic for taxpayers. He explained that it could lead to the unintended sale of earlier-purchased assets, which usually have the lowest cost basis, potentially resulting in higher-than-expected capital gains.

“You won’t have to be locked into FIFO as before,” Chandrasekera wrote, commenting on the IRS’ temporary transition relief.

IRS Ruffles Feathers

This change follows a lawsuit filed on December 27, 2024, by the Blockchain Association, DeFi Education Fund, and the Texas Blockchain Council. The organizations are challenging the IRS’s decision to categorize DeFi platforms as “brokers,” claiming that the move exceeds the agency’s legal authority, breaches the Administrative Procedure Act (APA), and is unconstitutional.

The new “broker” rule expands the definition of a “broker” to encompass decentralized exchanges (DEXs) and other platforms that facilitate digital asset transactions.

Under these regulations, DeFi platforms will be required to collect and report detailed transaction data, including gross proceeds, transaction dates, and user identities such as names, addresses, and TINs, using Form 1099-DA.

The new rules, set to take effect in 2027, are aimed at improving transparency and addressing tax evasion in the crypto space.

Michaela has no crypto positions and does not hold any crypto assets. This article is provided for informational purposes only and should not be construed as financial advice. The Shib Magazine and The Shib Daily are the official media and publications of the Shiba Inu cryptocurrency project. Readers are encouraged to conduct their own research and consult with a qualified financial adviser before making any investment decisions.

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