The United States Internal Revenue Service (IRS) has issued a temporary relief for a rule that would have defaulted crypto holders on centralized exchanges to a less-than-ideal accounting method.
The initial IRS ruling stated that if investors holding crypto assets with a CeFi broker don’t select their preferred accounting method, like HIFO (Highest In, First Out) or Spec ID, the broker will default to reporting sales using the FIFO method.
FIFO, otherwise known as “First In, First Out,” is the default method for calculating capital gains tax in the US. It is calculated by assuming the oldest cryptocurrency bought is sold first, pushing up a taxpayer’s capital gains.
“You won’t have to be locked into FIFO as before,” Cointracker head of tax Shehan Chandrasekera said in a Dec. 31 X post.
FIFO automatic rule postponed
Chandrasekera warned that imposing this rule immediately could have “been disastrous” for many crypto taxpayers during a bull market.
He said this would be because investors might “unintentionally” sell their earliest purchased assets — those with the lowest cost basis — first, thereby “unknowingly maximizing their capital gains.”
Crypto commentator Mark Thomas said in a Jan. 1 X post, “The one time that FIFO can be good is if your sale date is more than one year after the earliest crypto you bought, but less than one year after the latest crypto you bought.”
Related: IRS DeFi broker rule ‘absolutely should be challenged,’ says Uniswap CLO
“FIFO, in this case, would mean long-term capital gains instead of short-term,” Thomas said.
The temporary relief applies to sales on centralized crypto exchanges until Dec. 31, 2025, in order to give brokers time to support all accounting methods.
Crypto taxpayers will be able to maintain their own records until that date.
Blockchain Association takes legal action against IRS
The update comes just days after the Blockchain Association and the Texas Blockchain Council filed a lawsuit against the IRS on Dec. 28, arguing that the rules requiring brokers to report digital asset transactions and expanding existing requirements to include platforms like decentralized exchanges (DEXs) are unconstitutional.
Once the rules take effect in 2027, brokers must disclose information about taxpayers involved in digital asset transactions. The brokers must also report their gross proceeds from crypto and other digital asset sales.
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