- IRS delays FIFO rule, giving crypto investors time to use flexible accounting methods like HIFO and Spec ID.
- Legal challenges question IRS’s expanded reporting rules for digital assets, citing overreach and privacy concerns.
The Internal Revenue Service (IRS) has delayed the enforcement of a rule requiring centralized crypto exchanges to use the First In, First Out (FIFO) method for capital gains calculations.
Meanwhile, this relief extends until the 31st of December 2025, providing taxpayers and brokers additional time to adjust to the requirements.
FIFO calculates gains by assuming the oldest assets are sold first, which can result in higher taxable gains during rising markets.
This approach raised concerns among investors about inflated tax bills, prompting calls for flexibility.
During the relief period, taxpayers can instead choose methods like Highest In, First Out (HIFO) or Specific Identification (Spec ID) to reduce their tax exposure.
Concerns surrounding FIFO and alternative options
FIFO often leads to larger taxable gains since it prioritizes selling the assets purchased at the lowest cost.
This method is particularly challenging for crypto investors during a bull market when asset prices are significantly higher than their original purchase price.
Tax professionals like Shehan Chandrasekera, head of tax at CoinTracker, warned that implementing FIFO immediately could have caused severe tax burdens for investors.
He noted that many would unintentionally sell their oldest holdings,
“Maximizing their capital gains unknowingly.”
Alternative methods such as HIFO and Spec ID offer investors the flexibility to sell higher-cost assets first or select specific assets for sale. These options help reduce taxable gains and provide more control over tax planning.
The extended deadline allows brokers time to accommodate these methods, making compliance more manageable for all parties.
Legal challenges to expanded IRS crypto rules
The IRS’s decision comes amid legal challenges to its expanded reporting requirements for digital assets. On the 28th of December, the Blockchain Association and the Texas Blockchain Council filed a lawsuit against the IRS.
They argue that new rules requiring brokers to report all crypto transactions, including those on decentralized exchanges (DEXs), exceed the agency’s authority.
Under the expanded rules, scheduled to take effect in 2027, brokers must report taxpayer details and gross proceeds from crypto transactions.
Critics say these regulations impose unnecessary burdens on industry participants and raise privacy concerns.
The lawsuit seeks to prevent the implementation of these rules, claiming they are unconstitutional and overly broad.
Industry groups continue to push for clearer and more balanced regulations that do not hinder innovation or market participation.
Relief period gives time for adjustment
The extended deadline offers investors and brokers time to align their practices with evolving requirements.
Taxpayers can maintain their own records and use alternative accounting methods until the rules are enforced.
Crypto investors have welcomed the relief, seeing it as a step toward more practical solutions.
Commentators like Mark Thomas noted that FIFO may benefit investors in certain scenarios, such as long-term capital gains, but it is often unfavorable during short-term trades.
The IRS’s decision acknowledges the complexities of crypto taxation and provides breathing room for the industry to adapt.
