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The Internal Revenue Service (IRS) has announced temporary relief regarding crypto cost-basis reporting regulations, which may help digital asset investors evade increased tax liabilities.
This move underscores the agency’s awareness of the complexities involved in crypto taxation and the necessity for regulatory flexibility in light of changing market dynamics.
Tax Relief
The relief postpones the enforcement of a new rule that would have required centralized cryptocurrency exchanges to adopt the First In, First Out (FIFO) method for calculating capital gains. The FIFO method typically assumes the oldest assets are sold first, which can lead to greater tax liabilities during market rallies.
This extension will be effective until December 31, 2025, providing brokers with additional time to adapt to different accounting methods.
Investors expressed concerns that FIFO could inflate their tax liabilities by necessitating the sale of assets purchased at lower prices, thus increasing taxable gains. Shehan Chandrasekera, the head of tax at Cointracker, warned that immediate implementation of FIFO could significantly impact crypto investors by creating hefty tax obligations.
During this relief phase, taxpayers will have the option to utilize accounting methods like Highest In, First Out (HIFO) or Specific Identification (Spec ID). These alternatives allow investors greater control over which assets to sell, offering more flexibility and the potential to reduce tax liability.
Legal Challenges
The IRS’s announcement comes amid increasing legal and industry scrutiny regarding its evolving stance on digital asset taxation. On December 28, 2023, the Blockchain Association and the Texas Blockchain Council filed a lawsuit against the IRS, challenging its expanded reporting requirements.
This lawsuit contests the obligation for brokers to report all digital asset transactions, including those made on decentralized exchanges (DEXs), claiming that the regulations exceed constitutional limits.
Critics of the IRS’s broadened rules argue that they overstep the agency’s authority and impose unnecessary burdens on market participants. Under the extended requirements, slated to begin in 2027, brokers will be mandated to report taxpayer information and disclose gross proceeds from crypto transactions.
This temporary relief signifies the IRS’s recognition of the volatile nature of crypto markets and the diversity of investor strategies. Observers believe this decision represents a crucial step toward reconciling regulatory oversight with the practical realities faced by the crypto industry.
The delay is widely viewed as a positive development by market participants, providing additional time for the industry to adapt and ensure compliance.
