The IRS has issued a notice providing temporary relief to crypto holders interacting with centralized finance (CeFi) exchanges. The new relief by the IRS aims to solve issues associated with the new Section 6045 custodial broker regulations, which will come into effect in 2025.
As shared by Shehan Chandrasekera, the Head of Tax Strategy at Cointracker, “this is good news for crypto holders interacting with CeFi exchanges in 2025!”
Why IRS Has Issued the Relief
The IRS previously required all CeFi crypto brokers to fully comply with the Section 6045 custodial broker regulations starting Jan. 1, 2025. Under the new rules, the regulatory body mandated CeFi crypto brokers to sell holders’ assets using the FIFO accounting technique. This meant that the first purchased asset should have been the first one to be sold, unless the holder chooses to use either the Highest-In, First-Out (HIFO) or the Specific Identification (Spec ID) methods.
Many CeFi brokers, however, failed to prepare themselves to meet the Spec ID requirements before the stipulated deadline. Because of this many crypto holders would have been forced to use the default accounting method (FIFO). Under bullish market conditions, the FIFO accounting method would result in taxpayers being forced to sell their first bought assets hence lowest cost basis which would maximize holders’ capital gains.
Upon realizing this issue, the IRS has then opted to issue the temporary transition relief (Notice 2025-7) which will allow crypto holders selling their assets through CeFi brokers to use their books & records to document the specific digital assets they are selling.
The IRS also allows these holders to use their accounting software for the same purpose. This simply means that crypto holders can declare their sales without defaulting to the FIFO method.
CeFi Crypto Sales Reporting Beyond 2024
The new IRS relief will only be effective from Jan. 31, 2025 to Dec. 31, 2025. After this period all CeFi brokers must support the HIFO and Spec ID methods hence providing crypto holders with all the options.
“After 12/31/25, you must pick an accounting method for CeFi assets with the broker. By this time, I believe many brokers will support all accounting methods. So, make sure to pick your accounting method at your CeFi exchange on 1/1/26. If you don’t pick one, you will most likely default to FIFO,” said Shehan.
Crypto holders are not required to do anything to get this relief. The IRS automatically applies the relief to all holders. However, crypto asset holders must use reputable crypto tax software or reliable books & records.
