IRS postpones implementation of new reporting rules based on the cost of cryptocurrencies

The Internal Revenue Service (IRS) announced a temporary reprieve for cryptocurrency investors regarding new reporting rules that would have imposed a default accounting method for cryptocurrency transactions on centralized exchanges.

The change, which was initially scheduled to take effect in 2024, would have forced investors to use the FIFO (first-in-first-out) method of calculating capital gains unless they chose a different accounting method.

Under the first-out method, older assets are considered sold first, which can significantly increase capital gains for the taxpayer. Critics, including Shehan Chandrasekera, head of tax at Cointracker, have expressed concerns that immediate implementation of these rules could negatively impact investors during a market rally.

Chandrasekera noted that investors may inadvertently sell assets they bought early, which typically have a lower cost basis, resulting in higher capital gains taxes.

The IRS has now delayed the automatic application of the FIFO rule until December 31, 2025, allowing investors to keep their own accounting records until that date. This extension gives brokers enough time to adapt their systems to support different accounting methods, such as HIFO (highest in, first out) and defined definition.

In a related development, the Blockchain Association and the Texas Blockchain Council filed a lawsuit against the IRS on December 28, 2023, challenging the constitutionality of new rules requiring brokers to report digital asset transactions.

These rules, scheduled to be implemented in 2027, will require brokers to disclose taxpayer information and report gross proceeds from cryptocurrency sales.