- IRS delays new crypto tax rules until December 31, 2025, easing pressure on investors.
- The FIFO method could increase taxes, but delay gives investors time to choose other options.
- Spec ID and HIFO accounting methods are now available to manage crypto tax liabilities better.
The IRS has updated the new crypto tax regulation and postponed its effective date until December 31, 2025. This decision gives brokers and centralized exchanges more time to comply with the new rules. The delay also assists investors in escaping possible higher tax burdens that may have arisen from the implementation of the new rules at an early stage.
FIFO Method Concerns
Originally scheduled to begin in 2024, the proposed tax changes included using the First In, First Out (FIFO) accounting method for the centralized cryptocurrency exchange. FIFO assumes that the first cryptocurrency units purchased are the first to be sold, often leading to higher taxable gains. This is even more so in a rising market where the first investments made, particularly at relatively low prices, will be disposed of first.
With the new deadline, investors are saved from paying more taxes than they should. The delay also makes choosing between different accounting approaches easier and prevents assets from being sold at a lower price than their current market value. If the FIFO approach had been used, the investors would have offloaded the oldest assets first, which would have lower base prices. Therefore, this could have greatly raised their capital gains and, in turn, the taxes they paid.
Spec ID and HIFO Options
According to Shehan Chandrasekera, Head of Tax at CoinTracker, many centralized exchanges are not prepared to meet the Spec ID requirement before the end of January 2025. Spec ID allows investors to determine which assets they want to sell and thus better understand the tax implications. If this were not allowed, then exchanges would have had to use the first in, first out method. This could have posed many tax implications to crypto holders, especially if the market was doing well.
IRS DeFi Broker Rule Sparks Backlash: Crypto Experts Weigh InDue to the delay, crypto investors can select other accounting procedures, including Highest In, First Out (HIFO), or Spec ID. These options provide better control over the taxes on gains achieved and the overall taxes to be paid. Nevertheless, investors are required to choose an accounting method before January 1, 2026, or else they will be charged with using the FIFO method.
