The Internal Revenue Service (IRS) has temporarily relaxed cost-based reporting rules for cryptocurrencies, potentially avoiding increased tax liability for digital asset investors.
This decision reflects the authorities’ recognition of the complexity of virtual currency taxation and the need for regulatory adaptability in response to market evolution.
tax reduction
The relief package postpones the implementation of rules that would require centralized crypto exchanges to default to first-in, first-out (FIFO) accounting for calculating capital gains. FIFO typically assumes that the oldest assets are sold first, often increasing taxable gains during market upswings.
This extension will continue until December 31, 2025, giving brokers additional time to adjust to different accounting methods.
Investor concerns centered on the possibility of higher taxes due to FIFO being forced to sell assets it bought at lower prices, potentially increasing profits. Shehan Chandrasekera, head of tax at Cointracker, warned that the immediate implementation of FIFO could have a disproportionate impact on crypto taxpayers and result in significant tax burdens.
During the relief period, taxpayers can choose accounting methods such as Highest In, First Out (HIFO) or Specific Identification (Spec ID). These options allow investors to choose which assets to sell, providing flexibility and potentially reducing their tax burden.
legal challenge
The IRS announcement comes at the same time as increased legal and industry scrutiny of the IRS’ evolving approach to digital asset taxation. On December 28, the Blockchain Association and the Texas Blockchain Council filed a lawsuit challenging the IRS’ expanded reporting requirements.
The lawsuit challenges brokers’ obligations to report all digital asset transactions, including those made on decentralized exchanges (DEXs), arguing that the regulations exceed constitutional limits.
Critics of the IRS’ expanded rules argue that these rules exceed the agency’s authority and impose an undue burden on market participants. Under the expanded framework, which is scheduled to take effect in 2027, brokers will be required to report taxpayer information and disclose gross revenue earned from crypto trading.
This temporary relief underscores that the IRS recognizes the volatile nature of the cryptocurrency market and the diverse strategies of investors. Observers see this decision as a necessary step to balance regulatory oversight with the operational realities of the crypto industry.
Market participants widely view this delay as a constructive development, giving the industry more time to adapt and comply.
