The U.S. Internal Revenue Service (IRS) has announced a temporary transition relief, delaying the implementation of new crypto tax reporting requirements until the start of 2026. This decision aims to provide brokers with adequate time to adapt to the regulations, which include determining the cost basis for cryptocurrencies held on centralized platforms (CeFi exchanges).
What the Delay Means for Crypto Holders
Shehan Chandrasekera, Head of Tax at CoinTracker, described the delay as positive news for crypto investors using CeFi exchanges:
“This is good news for crypto holders interacting with CeFi exchanges in 2025.”
The transition relief applies to crypto sales made on CeFi exchanges from January 1, 2025, to December 31, 2025. After this grace period, investors must select an accounting method for their CeFi assets starting January 1, 2026.
Chandrasekera emphasized the importance of synchronizing the accounting method chosen with the broker and crypto tax software:
“Pick an accounting method at the CeFi exchange by 1/1/26 and ensure it matches the broker’s system for seamless tax reporting.”
IRS Custodial Broker Rules and Potential Impacts
In July 2024, the IRS finalized rules for custodial brokers, setting the groundwork for how crypto sales should be handled on centralized exchanges. The original mandate, slated to take effect on January 1, 2025, required brokers to determine which crypto units are sold when investors hold multiple units of the same cryptocurrency.
If no accounting method was chosen by the taxpayer, the First-In, First-Out (FIFO) method would automatically apply. This method, which sells the oldest assets first, could have led to higher taxable gains, especially during a bull market.
Chandrasekera pointed out a critical issue:
“Almost all CeFi brokers were not ready to support Specific Identification (Spec ID) as of 1/1/25. This could have been disastrous for many taxpayers in a bullish market.”
The Specific Identification (Spec ID) method allows investors to choose which cryptocurrency units to dispose of, often providing significant tax benefits compared to FIFO.
Industry Reactions and Legal Challenges
The one-year delay allows brokers to enhance their systems to support accounting methods like Spec ID, offering crypto investors more flexibility. However, the IRS’ new crypto tax regulations have sparked legal battles.
On December 28, 2024, the Blockchain Association and Texas Blockchain Council filed a lawsuit against the IRS, opposing the broker reporting mandate. They argue that the new rules impose unnecessary burdens and infringe on privacy.
Conclusion
The IRS’ decision to postpone crypto tax reporting requirements offers much-needed relief to brokers and investors alike. As the industry adjusts, taxpayers should prepare to align their accounting methods with evolving regulations, ensuring compliance and minimizing tax liabilities.
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