As a seasoned tax analyst with over two decades of experience under my belt, I can confidently say that the recent move by the Internal Revenue Service (IRS) to provide temporary relief for cryptocurrency holders using centralized exchanges is a step in the right direction. The new regulations, which take effect on January 1, 2025, acknowledge the complexities and nuances of the crypto market, particularly when it comes to tax reporting.
The IRS’s decision to offer taxpayers the flexibility to use their own records or crypto tax software to identify which specific units they are selling is a breath of fresh air. This temporary solution alleviates the burden placed on cryptocurrency holders by the First-In, First-Out (FIFO) accounting method, which can artificially inflate capital gains due to its assumption that the oldest cryptocurrency bought is sold first.
However, it’s essential to remember that this relief applies only to CeFi transactions between January 1, 2025, and December 31, 2025. After this period, taxpayers will need to select an accounting method with their broker, or FIFO will most likely be selected by default.
The IRS’s renewed focus on crypto tax compliance is not surprising, given the surge in cryptocurrency adoption and the potential for tax evasion. As a tax analyst who has witnessed numerous tax reforms over the years, I can attest that the agency is always one step ahead when it comes to adapting to new financial landscapes.
In a lighter note, let me share an amusing thought: If only our ancestors could see us now, haggling over which specific unit of digital currency to sell and debating the merits of FIFO versus HIFO! It’s a far cry from the days when bartering livestock and grains was the norm. Times indeed have changed!
In the year 2025, the U.S. Internal Revenue Service (IRS) has announced a provisional aid plan designed to assist individuals who own and trade cryptocurrencies via centralized platforms.
On December 31, as per a post on social media platform X, Shehan Chandrasekera (Head of Tax Strategy at Cointracker) announced some news.
IRS Eases Crypto Tax Burden for Some Holders
This action pertains to the implementation of section 6045 of the custodial broker rules, set to commence on January 1st, 2025.
Shehan Chandrasekera stated, “The Internal Revenue Service has announced some positive news for individuals dealing with Centralized Finance (CeFi) crypto exchanges in the year 2025, as a temporary respite has been granted.
Under these rules, traders can opt for the traditional First-In, First-Out (FIFO) approach when managing their digital assets, but they also have the option to select alternative methods like Highest-In, First-Out (HIFO) or Specific Identification (Spec ID). However, it’s essential to note that the FIFO method implies that the earliest acquired cryptocurrency is sold before others, potentially inflating a taxpayer’s capital gains.
Chandrasekera pointed out that as of January 1st, 2025, almost all Centralized Finance (CeFi) brokers were not prepared to accommodate Specific ID, leaving investors with no other choice but to sell their CeFi assets according to the First In, First Out (FIFO) rule. This could have been problematic for many taxpayers in a rising market since they might have been inadvertently selling their earliest acquired assets first, which often have the lowest cost basis, thus incurring higher capital gains unintentionally.
Currently, the IRS has recognized this matter and proposed a provisional remedy. In the meantime, taxpayers have the option to either rely on their personal records or utilize crypto tax software for determining precisely which units they’re trading when making sales.
As an analyst, I’d like to point out that when you liquidate assets through a CeFi broker, you can continue to keep track of the exact units you’ve sold by utilizing your financial records or crypto tax software for documentation purposes.
Starting from January 1, 2026, individual taxpayers will no longer have the relief for CeFi transactions as it only applies from January 1, 2025, to December 31, 2025. After this period, they will be required to choose an accounting method in consultation with their broker. If a specific method is not chosen, the default option will likely be FIFO (First In, First Out).
The recent announcement by the IRS, made on December 27th, reveals fresh tax rules for cryptocurrencies. These new regulations stipulate that decentralized finance (DeFi) intermediaries are now required to gather comprehensive details regarding their clients and transaction activities.
For the past year, the agency has significantly increased its actions against crypto tax evasion. In fact, they have created an artificial intelligence tool to aid in this mission.
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2025-01-01 13:53