Crypto Cost-Basis Changes: IRS Introduces Temporary Relief

The rules would have required cryptocurrency holders on centralized exchanges to default to the FIFO (First In, First Out) accounting method if they did not explicitly select a preferred method, such as HIFO (Highest In, First Out) or Specific Identification.

FIFO assumes the oldest cryptocurrency purchased is sold first, often resulting in higher taxable gains. This approach is particularly unfavorable in bull markets, where asset prices typically rise over time. Shehan Chandrasekera, head of tax strategy at CoinTracker, welcomed the temporary relief, stating in a Dec. 31 post on X (formerly Twitter), “You won’t have to be locked into FIFO as before.”

He cautioned that immediate enforcement of the rule could have led to significant financial harm, as many taxpayers might unintentionally sell low-cost-basis assets first, maximizing their taxable capital gains.

Crypto commentator Mark Thomas noted a rare scenario where FIFO might be advantageous. In a Jan. 1 post on X, he explained that FIFO could work in a taxpayer's favor if the sale date is more than one year after the earliest crypto purchase but less than one year after the most recent purchase. Under these circumstances, FIFO could qualify the gains for long-term capital gains tax rates, which are lower than short-term rates.

The temporary relief, effective until Dec. 31, 2025, provides brokers with additional time to support various accounting methods, allowing taxpayers to maintain their records and choose the most suitable method for their tax strategy. This delay is seen as a positive development for the crypto community, reducing immediate compliance pressures while promoting more accurate reporting.

The relief coincides with legal challenges to broader IRS rules for digital assets. On Dec. 28, the Blockchain Association and the Texas Blockchain Council filed a lawsuit against the IRS, arguing that expanded broker reporting requirements, including those for decentralized exchanges (DEXs), are unconstitutional. 

The groups claim these rules impose excessive burdens on decentralized platforms, which often lack the infrastructure to meet such requirements.

Starting in 2027, the new rules will require brokers to disclose detailed information about taxpayers involved in digital asset transactions and report gross proceeds from crypto sales. While these measures aim to enhance transparency and curb tax evasion, critics argue they could stifle innovation and create significant compliance challenges for both centralized and decentralized platforms.