The IRS has introduced a temporary policy to ease tax compliance for crypto holders using centralized exchanges (CeFi). This exemptive relief is applicable until 2025, ensuring flexibility in selecting the recognized accounting method applicable to most assets.
The policy greatly relieves the impact of using the first-in-first-out rule, under which any sale of securities may unintentionally trigger unexpectedly high income tax liabilities among crypto holders.
The IRS notice now indicates that taxpayers can identify which units of the same type of digital assets are sold, transferred, or disposed of within the same broker-held account to manage tax liabilities.
The relief focuses on the simplification of the cost basis rules by providing options to identify units, such as acquisition date, price, or other identifiers. Taxpayers may also establish standing orders for asset identification.
Infrastructure investment and Jobs Act’s impact on crypto asset rules
This is also consistent with evolving digital asset regulation in light of the enlarged definition of “specified security” under the Infrastructure Investment and Jobs Act.
These changes imposed additional, more stringent reporting and cost-basis rules for cryptocurrency transactions. Investors who have had to make the adjustment in light of these changes, however, may find some temporary reprieve.
The policy also takes into consideration the technical preparedness of brokers. Some of the brokers might not have the systems in place to process taxpayers for specific instructions by 2025. The IRS permits the taxpayers to rely on other means of identification during the transition period. This includes assigning a cost basis using their records or opting for a safe harbor outlined in IRS guidance.
It has a relief period beginning Jan. 1, 2025, until Dec. 31, 2025. After this time, the standard rules relating to FIFO will be applicable subject to other regulations being passed. The IRS does reiterate that the temporary policy “does not change the broader existing tax law and principles involved in the taxation of digital assets.
This exemption is a key step in addressing some general complexities of crypto taxation. It offers a delicate balance between regulatory compliance with practical challenges that taxpayers and brokers have to face. However, such steps could mark the beginning toward a more simplified world of taxation.
