The Internal Revenue Service (IRS) has issued a temporary relief measure to address potential tax complications for cryptocurrency holders using centralized finance (CeFi) brokers in 2025.
The relief, as explained by Shehan Chandrasekera, Head of Tax Strategy at CoinTracker, mitigates the impact of new regulations under Section 6045, requiring CeFi brokers to report cryptocurrency transactions and utilize specific accounting methods for asset sales.
The Challenge of Default FIFO
Prior to this relief, if cryptocurrency holders did not explicitly choose an accounting method like Highest In, First Out (HIFO) or Specific Identification (Spec ID), brokers would default to First In, First Out (FIFO). This default method can significantly increase tax liabilities, especially in bullish markets, by prioritizing the sale of the earliest purchased assets, which often have the lowest cost basis.
The situation was further exacerbated by the fact that, as of January 1, 2025, most CeFi brokers lacked the infrastructure to support Spec ID accounting.
IRS Notice 2025-7 Offers Flexibility
In response to these challenges, the IRS issued Notice 2025-7. This notice provides temporary relief for cryptocurrency sales conducted on CeFi exchanges between January 1 and December 31, 2025. Taxpayers can now bypass the default FIFO method by utilizing their own records or crypto tax software to specify which assets are being sold, offering greater flexibility during this transitional period.
No Immediate Action Required, But Planning is Key
Chandrasekera emphasized that this relief is automatic and does not require any immediate action from taxpayers. However, starting January 1, 2026, CeFi users must select an accounting method with their brokers to avoid defaulting to FIFO. By this time, most brokers are expected to support a wider range of accounting options, streamlining tax compliance.
Taxpayers are strongly advised to maintain detailed records or utilize reputable crypto tax software to ensure accurate reporting and alignment with their chosen accounting methods. Failure to do so could result in default FIFO sales, which may not be ideal for many investors. Chandrasekera urged users to proactively plan and verify that their broker's accounting methods are compatible with their tax software to prevent discrepancies.
This development comes amidst ongoing controversy surrounding the IRS's recent expansion of the broker reporting rule to include decentralized finance (DeFi) platforms. This rule, mandated by the Infrastructure Investment and Jobs Act, requires DeFi platforms to report transactions despite their decentralized nature.
The rushed implementation has faced significant legal challenges from entities like A16z Crypto and the DeFi Education Fund, who argue that the rule violates the Administrative Procedure Act and exceeds the Treasury Department's authority.
January 2025, Cryptoniteuae