Introduction
The Internal Revenue Service (IRS) has recently relaxed a rule that would have forced cryptocurrency holders using centralized exchanges to default to the FIFO method for tax reporting. This decision aims to alleviate the financial burden on investors, particularly during volatile market conditions such as bull markets.
Initial IRS Rulings
In their initial rulings, the IRS stated that if investors holding crypto assets with Centralized Finance Intermediaries (CeFi) brokers do not select their preferred accounting methods—such as HIFO (Highest In, First Out) or Spec ID—the broker will default to reporting sales using the FIFO method.
What is FIFO?
FIFO stands for "First In, First Out." It is the default capital gains tax calculation method in the United States, assuming that the oldest cryptocurrency purchased is sold first, which pushes up a taxpayer’s capital gains.
Response from Cointracker Head of Tax
Shehan Chandrasekera, head of tax at Cointracker, commented in an Xpost on December 31. She stated that this rule could have been disastrous for many crypto taxpayers during a bull market because investors might inadvertently sell their earliest purchased assets—those with the lowest cost basis—first, thereby unknowingly maximizing their capital gains.
Crypto Commentator’s Perspective
Mark Thomas, a crypto commentator, shared his views in an Xpost on January 1. He noted that FIFO is typically beneficial if sales occur more than one year after the earliest crypto purchased but before the latest purchase. In such cases, it would mean long-term capital gains instead of short-term.
Temporary Relief Details
The IRS has announced temporary relief for this rule until December 31, 2025. This adjustment is intended to provide some clarity and flexibility for investors during a time when market conditions may make adhering to complex tax rules particularly burdensome.
Impact on Long-Term vs. Short-Term Gains
The relaxation of the FIFO default is expected to influence how investors classify their gains, which can have significant implications for their tax liabilities and overall financial planning.
Legal Actions and Organizational Responses
In response to these changes, several organizations have taken legal action or expressed support for the decision. Notably, the Blockchain Association has condemned the IRS’s action as an overreach that undermines the principle of non-discrimination in tax treatment.
Conclusion
The IRS’s temporary relaxation of its crypto tax rules is a significant development in the ongoing regulatory landscape surrounding cryptocurrency investments. While this decision aims to ease investor burden, it also raises important questions about the future direction of crypto-related taxes and regulations.
— references —
- Shehan Chandrasekera
- Mark Thomas
