The IRS has postponed the implementation of new crypto cost-basis reporting rules until January 1, 2026, giving brokers additional time to adapt to the updated regulatory requirements.
Background
- The U.S. Internal Revenue Service (IRS) announced a one-year delay in enforcing new crypto cost-basis reporting rules, initially set to take effect on January 1, 2025
- The rules require brokers to accurately determine the cost basis of cryptocurrencies on centralized platforms when investors sell assets
- If taxpayers fail to specify their preferred tax accounting method, the First-In, First-Out (FIFO) method will automatically apply. FIFO assumes the earliest acquired crypto assets are sold first, potentially resulting in higher capital gains taxes
- The IRS initially introduced these rules in July 2023
- The delay aims to give centralized finance (CeFi) brokers more time to upgrade their systems and processes to accommodate these requirements effectively
Why should you pay attention?
- Investor Impact: Without the delay, crypto investors would have been forced to use the FIFO method, potentially leading to higher taxable gains
- Broker Preparedness: Many centralized platforms are not yet equipped to support alternative accounting methods, making compliance difficult without the extension
- Tax Clarity: The delay provides both brokers and investors with additional time to understand and implement the new rules, ensuring smoother compliance
- Market Environment: With a potential bull market ahead, the one-year delay prevents forced sales of older, lower-cost basis assets, which could have created significant tax burdens for investors
Who said what?
- Shehan Chandrasekera, Head of Tax at CoinTracker:
“Almost all CeFi brokers were not prepared to support the specific identification method”
- On the risks of FIFO during a bull market, Chandrasekera said:
“In a bull market environment, this could have been disastrous for many taxpayers because you'd be unintentionally selling the earliest purchased asset (which tends to have the lowest cost basis) first, while unknowingly maximizing your capital gains”
Zooming out
- The IRS’s decision to delay the implementation of crypto cost-basis reporting rules reflects the ongoing challenges of regulating the cryptocurrency industry
- Centralized platforms now have an additional year to align their systems with regulatory requirements, potentially reducing the risk of errors and confusion
- For crypto investors, this delay means greater flexibility in managing their tax positions and potentially reducing their tax liabilities
- As the new implementation date approaches in 2026, both brokers and investors will need to stay informed and prepared for compliance with the updated accounting requirements
