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 typically associated with digital asset transactions.
The new regulations will take effect from January 1, 2025, to December 31, 2025, allowing CeFi exchange users to utilize their own records or tax software to determine the specific value of the cryptocurrencies sold. This marks a significant departure from the traditional FIFO method, which requires taxpayers to sell the oldest assets first.
FIFO (First In, First Out), also known as 'first come, first served,' is the default method for calculating capital gains tax in the U.S. It is calculated by assuming that the oldest cryptocurrency is sold first.
A cryptocurrency tax official described that if taxpayers report their taxes according to the IRS's FIFO rule during a bull market, it could be 'disastrous' for cryptocurrency taxpayers. If investors sell their earliest purchased assets first (i.e., those that may have the lowest cost basis), they 'unwittingly maximize their capital gains,' increasing the taxpayer's 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 should be noted that this relief measure is temporary and only applicable for the designated 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 forms of income.
The IRS's final regulations on cryptocurrency tax reporting are of great significance to the industry.
1. Broker Definition: The IRS has narrowed the definition of 'broker,' excluding non-custodial industry participants such as decentralized exchanges and non-custodial digital asset wallet providers. 2. Reporting Requirements: Providers of custodial wallets and payment processors facilitating cryptocurrency transactions will be regarded as brokers for U.S. federal tax purposes. 3. Stablecoin Issuers: Stablecoin issuers that convert stablecoins to cash will also be considered brokers. 4. Non-U.S. Brokers: Non-U.S. brokers (with the exception of foreign partnerships controlled by U.S. persons) are exempt from U.S. cryptocurrency tax reporting requirements.
The IRS is still examining whether non-custodial platforms should bear reporting responsibilities. The final regulations narrowed the reporting rules for payment data and application providers (PDAP) and excluded digital asset lending from information reporting, although this exemption may change in the future.
Despite the IRS providing temporary exemption policies for CeFi users, its demand for DeFi brokers to report user transaction data has sparked considerable controversy.
Three U.S. cryptocurrency industry groups, including the DeFi Education Fund, the Blockchain Association, and the Texas Blockchain Council, have sued the IRS to stop its new requirement for decentralized finance (DeFi) operators or institutions to report client information.
This controversial regulation is expected to take effect in 2027, requiring some DeFi front-end operators to collect users' personal information and transaction histories.
"The IRS Provides Temporary Relief Measures for Cryptocurrency Tax Reporting for the 2025 Tax Year" was originally published on (Blockcast).