The IRS recently announced a temporary relief measure aimed at cryptocurrency holders using centralized exchanges (CEX). This initiative allows these users to adopt flexible asset accounting methods, exempting them from the strict FIFO tax obligations that typically accompany digital asset transactions.
The new regulations will take effect from January 1, 2025, to December 31, 2025, allowing users of CeFi exchanges to determine the specific value of the cryptocurrencies sold using their own records or tax software. This signifies a significant departure from the traditional FIFO method, which requires taxpayers to sell their oldest assets first.
FIFO (First In, First Out), also known as 'first-in-first-out', is the default method for calculating capital gains tax in the United States. It is calculated by assuming that the oldest cryptocurrency is sold first.
A cryptocurrency tax supervisor described that if taxpayers report according to the IRS's FIFO rules during a bull market, it would be 'disastrous' for cryptocurrency taxpayers. Investors who sell their earliest purchased assets (i.e., those with potentially the lowest cost basis) 'unwittingly maximize their capital gains', driving up taxpayers' capital gains.
The IRS's latest temporary exemption policy aims to alleviate the high tax burden associated with strict FIFO rules, allowing cryptocurrency holders greater flexibility when reporting and tracking their digital asset sales. However, it is important to note that this relief measure is temporary and only applies during the specified period in 2025.
The IRS treats cryptocurrency as property similar to stocks and imposes two main taxes on cryptocurrency transactions:
Capital Gains Tax: Applicable to trading activities.
Income Tax: Applicable to rewards or earnings, such as mining, staking, interest, or any other form of income.
The IRS's final regulations on cryptocurrency tax reporting are of significant importance to the industry:
Broker Definition: The IRS narrowed the definition of 'broker' to exclude non-custodial industry participants, such as decentralized exchanges and non-custodial digital asset wallet providers.
Reporting Requirements: Providers of custodial wallets and payment processors facilitating cryptocurrency transactions will be considered brokers for U.S. federal tax purposes.
Stablecoin Issuers: Stablecoin issuers that exchange stablecoins for cash will also be considered brokers.
Non-U.S. Brokers: Non-U.S. brokers (excluding foreign partnerships controlled by U.S. persons) are exempt from U.S. cryptocurrency tax reporting requirements.
The IRS is still studying whether non-custodial platforms should bear reporting responsibilities. The final regulations narrowed the reporting rules for payment data and application providers (PDAP), excluding digital asset loans from information reporting, although this exemption may change in the future.
Despite the IRS providing a temporary exemption policy for CeFi users, the requirement for DeFi brokers to report user transaction data has sparked considerable controversy.
Three cryptocurrency industry groups in the U.S., including the DeFi Education Fund, The Blockchain Association, and the Texas Blockchain Council, are suing the IRS in an effort to stop the new regulations requiring decentralized finance (DeFi) operators or institutions to collect customer data.
This controversial regulation is expected to take effect in 2027, at which point some DeFi front-end operators will be required to collect users' personal information and transaction history.
Further Reading:
Does DeFi also need KYC? IRS new rules: DeFi brokers must report user transaction data.
This article is republished with permission from: (Block客)
'Relaxing cryptocurrency tax regulations! The IRS launches relief measures, but the new DeFi regulations remain controversial.' This article was first published in 'Crypto City'