Key Takeaways
- The temporary relief gives brokers additional time to upgrade their systems to support multiple accounting methods.
- FIFO, “First In, First Out,” is an inventory accounting method used in the US to value a firm’s inventory
The United States Internal Revenue Service (IRS) has provided temporary relief for crypto holders by postponing the enforcement of a new rule regarding how gains and losses are calculated for tax purposes. This reprieve, which applies until December 31, 2025, addresses concerns over the mandatory use of the “First In, First Out” (FIFO)
FIFO stands for “first in, first out” and is an inventory accounting method used in the US to value a firm’s inventory and calculate the cost of goods sold
The initial ruling by the IRS required brokers to default to the FIFO method unless investors specifically selected alternative methods such as “Highest In, First Out” (HIFO) or “Specific Identification” (Spec ID). FIFO calculates capital gains by assuming that the earliest purchased crypto is sold first, which could result in higher taxable gains for investors, particularly during market upswings.
The temporary relief gives brokers additional time to upgrade their systems to support multiple accounting methods. Investors, in the meantime, can continue to track their own records and use methods like HIFO or Spec ID, which allow them to minimize taxable gains by prioritizing the sale of higher-cost assets.
Crypto commentator Mark Thomas took to X to detail the ramifications of the development. “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.”
For instance, if an investor’s earliest purchase occurred more than a year before a sale, while later purchases occurred within the past year, FIFO could qualify gains as long-term instead of short-term, potentially reducing the tax burden. However, this is highly case-specific and depends on an investor’s individual trading history.
The relief applies exclusively to sales conducted through centralized exchanges. The IRS’s decision aims to address the practical challenges of implementing strict compliance measures in the rapidly evolving cryptocurrency market. The move also underscores the agency’s awareness of the complexities faced by both taxpayers and brokers in adhering to new rules.
Under the new regulations, the IRS has classified various DeFi platforms providing digital asset transactions through smart contracts as brokers. The latest development comes days after the Blockchain Association filed a lawsuit against the IRS condemning the regulator’s definition of ‘brokers’ while also expressing concerns over infringement of users’ privacy rights.
