IRS Modifications to Crypto Tax Rules Extend Flexibility Through 2025
by aria-crypto.com
January 1, 2025 at 06:29
IRS Modifications to Crypto Tax Rules Extend Flexibility Through 2025
The IRS has granted a temporary dispensation from a previously looming rule requiring crypto investors to use a potentially disadvantageous accounting method for tax reporting on centralized exchanges. Initially, the IRS stated that unless investors specifically choose a tax accounting method, brokers on centralized finance (CeFi) platforms would use the First-In, First-Out (FIFO) method by default. This method typically increases the tax liability by assuming the first purchased cryptocurrency is sold first, which could be detrimental during periods of significant price increases. Shehan Chandrasekera, head of tax at Cointracker, highlighted the severe impacts this could have had, especially in a bull market, by forcing taxpayers to sell their lowest cost basis assets first. However, with this temporary relief, crypto taxpayers will not be forced into using FIFO until after December 31, 2025, providing them the opportunity to choose from methods like Highest In, First Out (HIFO) or Specific Identification (Spec ID). This move offers essential breathing room, allowing for a more strategic planning of crypto asset sales that could result in more favorable tax outcomes. It also comes in the wake of legal challenges against the IRS by cryptocurrency advocacy groups, questioning the inclusion of decentralized exchanges (DEXs) in upcoming mandatory reporting rules starting in 2027.
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