The United States Internal Revenue Service (IRS) has issued a temporary relief from a rule that would have defaulted crypto holders on centralized exchanges to a less-than-ideal accounting method. This change provides some breathing room for investors, allowing them to maintain their preferred accounting methods until 2025.
What is the Issue with FIFO?
The initial IRS rulings stated that if investors holding crypto assets with a Centralized Exchange (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, also 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.
"You won’t have to be locked into FIFO as before," said Cointracker head of tax Shehan Chandrasekera in a Dec. 31 Xpost. This change is significant because it would prevent investors from unintentionally selling their earliest purchased assets – those with the lowest cost basis – first, thereby unknowingly maximizing their capital gains.
The Potential Consequences of Imposing FIFO Immediately
Chandrasekera warned that imposing this rule immediately could have been disastrous for many crypto taxpayers during a bull market. He emphasized that investors might unintentionally sell their earliest purchased assets, leading to increased capital gains tax liability.
Crypto commentator Mark Thomas also weighed in on the issue, saying "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 case, Thomas explained that using FIFO would mean long-term capital gains instead of short-term.
Temporary Relief and Its Implications
The temporary relief applies to sales on centralized crypto exchanges until Dec. 31, 2025, in order to give brokers time to support all accounting methods. This means that crypto taxpayers will be able to maintain their own records until that date.
This update comes just days after the Blockchain Association and the Texas Blockchain Council filed a lawsuit against the IRS on Dec. 28, arguing 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.
Background on the Lawsuit Against the IRS
The lawsuit filed by the Blockchain Association and the Texas Blockchain Council challenges the constitutionality of the rules requiring brokers to report digital asset transactions. They argue that these rules infringe upon taxpayers’ rights to privacy and due process.
This development highlights the ongoing debate between regulators and industry stakeholders regarding the treatment of cryptocurrency under tax law. The IRS has been working to clarify its stance on crypto taxation, but its efforts have not gone unchallenged by those in the industry who argue that these regulations are overly broad and burdensome.
What Does This Mean for Crypto Taxpayers?
For now, crypto taxpayers can breathe a sigh of relief. The temporary relief from the FIFO rule means that they will be able to maintain their preferred accounting methods until 2025. However, it is essential for investors to remain vigilant and continue to monitor developments in this area.
As the industry continues to evolve, one thing is clear: the treatment of cryptocurrency under tax law will remain a contentious issue. Regulators must strike a balance between collecting taxes and respecting taxpayers’ rights to privacy and due process.
Conclusion
The temporary relief from the FIFO rule provides some much-needed breathing room for crypto investors. However, this development also highlights the ongoing debate between regulators and industry stakeholders regarding the treatment of cryptocurrency under tax law.
As the industry continues to grow and evolve, it is essential for regulators to work closely with industry stakeholders to ensure that tax laws are fair and effective. The temporary relief from the FIFO rule is a step in the right direction, but much work remains to be done to address the complex issues surrounding crypto taxation.
Recommended Reading
- IRS DeFi broker rule ‘absolutely should be challenged,’ says Uniswap CLO
- Down to $200 one day, Pixels founder had $2.4M the next: Luke Barwikowski, X Hall of Flame
Subscribe to Our Crypto Biz Newsletter
Stay up-to-date with the latest trends and developments in blockchain and crypto by subscribing to our Crypto Biz newsletter. Delivered every Thursday, this newsletter provides valuable insights into key business trends and regulatory shifts.
By subscribing, you agree to our Terms of Service and Privacy Policy.
