The United States Internal Revenue Service (IRS) has announced a temporary reprieve regarding a proposed rule that would automatically classify crypto holders on centralized exchanges under a specific accounting method. Initially, the IRS declared that investors who hold crypto assets with a centralized finance broker and fail to select a preferred accounting method—such as HIFO (Highest In, First Out) or Specific Identification—would default to using the FIFO (First In, First Out) method for reporting sales.
FIFO requires calculating capital gains by considering the oldest purchased cryptocurrency as sold first, which often increases the capital gains reported by taxpayers. The decision to impose this rule immediately was cautioned against by Shehan Chandrasekera, the head of tax at Cointracker, who noted that it could have been particularly harmful during a bull market, potentially leading taxpayers to inadvertently sell their earliest and lowest-cost assets first, thus maximizing their capital gains.
Crypto analyst Mark Thomas highlighted a potential advantage of FIFO: if crypto sold is held for more than a year, it qualifies for the long-term capital gains tax, which is usually lower than the short-term rate. The temporary relief concerning the FIFO method applies to centralized exchange sales until December 31, 2025, allowing brokers time to implement support for various accounting methods. Until then, crypto taxpayers are advised to maintain their records carefully.
This development follows a lawsuit by the Blockchain Association and the Texas Blockchain Council against the IRS. These groups argue that IRS rules mandating brokers to report digital asset transactions and extend existing requirements to non-centralized platforms are unconstitutional. Once these rules are enacted in 2027, brokers must report taxpayer information related to digital asset transactions and disclose their gross proceeds from such sales.
