The United States Internal Revenue Service (IRS) has issued a temporary relief for a rule that would have defaulted crypto holders on centralized exchanges to a less-than-ideal accounting method. This development comes as a welcome respite for cryptocurrency investors who were worried about the implications of this rule.
Initial IRS Rulings and Concerns
The initial IRS rulings stated that if investors holding crypto assets with a CeFi broker don’t select their preferred accounting method, like HIFO (Highest In, First Out) or Spec ID, the broker will default to reporting sales using the FIFO method. FIFO, otherwise known as ‘First In, First Out,’ is the default method for calculating capital gains tax in the US. It is calculated by assuming the oldest cryptocurrency bought is sold first, pushing up a taxpayer’s capital gains.
FIFO Automatic Rule Postponed
Cointracker head of tax Shehan Chandrasekera said in a Dec. 31 Xpost that this would be disastrous for many crypto taxpayers during a bull market. He warned that imposing this rule immediately could lead to investors unintentionally selling their earliest purchased assets – those with the lowest cost basis – first, thereby unknowingly maximizing their capital gains.
The Risks of Using FIFO
Crypto commentator Mark Thomas said in a Jan. 1 Xpost that while FIFO can be good in some cases, it’s not always the best choice for cryptocurrency investors. He noted that ‘the one time that FIFO can be good is if your sale date is more than one year after the earliest crypto you bought, but less than one year after the latest crypto you bought.’
In this scenario, Thomas explained, FIFO would mean long-term capital gains instead of short-term. This highlights the complexities and nuances involved in choosing an accounting method for cryptocurrency investments.
Temporary Relief Applies to Centralized Exchanges
The temporary relief applies to sales on centralized crypto exchanges until Dec. 31, 2025. This gives brokers time to support all accounting methods, allowing crypto taxpayers to maintain their own records until that date.
Blockchain Association Takes Legal Action Against IRS
This update comes just days after the Blockchain Association and the Texas Blockchain Council filed a lawsuit against the IRS on Dec. 28. They argued that the rules requiring brokers to report digital asset transactions and expanding existing requirements to include platforms like decentralized exchanges (DEXs) are unconstitutional.
Once the rules take effect in 2027, brokers must disclose information about taxpayers involved in digital asset transactions. The brokers must also report their gross proceeds from crypto and other digital asset sales.
Impact on Cryptocurrency Taxpayers
The temporary relief is a welcome development for cryptocurrency investors who were worried about the implications of this rule. By giving brokers time to support all accounting methods, the IRS has shown that it is willing to listen to concerns and adapt its rules accordingly.
However, the lawsuit filed by the Blockchain Association and the Texas Blockchain Council highlights the ongoing debate surrounding cryptocurrency regulations in the US. The outcome of this case will have significant implications for the cryptocurrency industry as a whole.
What Does This Mean for Cryptocurrency Investors?
This temporary relief means that crypto taxpayers can continue to use their preferred accounting method until Dec. 31, 2025. However, investors should be aware that this rule may change in the future, and they should stay informed about any developments in cryptocurrency regulations.
In the meantime, cryptocurrency investors should take steps to maintain accurate records of their transactions and investments. This will help them navigate the complexities of tax laws and ensure compliance with regulatory requirements.
Conclusion
The temporary relief issued by the IRS is a positive development for cryptocurrency holders on centralized exchanges. By giving brokers time to support all accounting methods, the IRS has shown that it is willing to listen to concerns and adapt its rules accordingly.
However, the lawsuit filed by the Blockchain Association and the Texas Blockchain Council highlights the ongoing debate surrounding cryptocurrency regulations in the US. The outcome of this case will have significant implications for the cryptocurrency industry as a whole.
Cryptocurrency investors should stay informed about any developments in regulatory requirements and take steps to maintain accurate records of their transactions and investments. By doing so, they can navigate the complexities of tax laws and ensure compliance with regulatory requirements.
Additional Resources
For more information on cryptocurrency regulations and tax laws, please visit:
We hope this article has provided you with valuable insights into the temporary relief issued by the IRS and its implications for cryptocurrency holders on centralized exchanges. Stay informed, stay ahead!
