What is the IRS announcing about crypto cost-basis methods?

In an interesting development, the IRS has temporarily relieved crypto holders of centralized exchanges from using FIFO for crypto accounting until December 31, 2025. This means that, if you were using your own records or tax software to identify specific units of cryptocurrency being sold, you don’t have to default to FIFO, which was the initial stance that really escalated taxes on realized gains.

How will this update affect small businesses and crypto investors?

Small businesses

This could be a game changer for businesses utilizing crypto via cross-border payments. The timing is necessary as many CeFi brokers still haven't configured themselves to manage multiple methods, which would have effectively forced a default to FIFO, thereby inflating their tax bill.

Crypto investors

The temporariness of this relief comes at a crucial time. Investors won't be shackled to FIFO—where the oldest coins must be sold first, potentially resulting in hefty capital gains during an upswing. This provides some breathing room, especially as taxpayers struggle to follow regulations laid out in 2022.

What’s happening with ongoing lawsuits against the IRS?

The Blockchain Association and Texas Blockchain Council have filed lawsuits against the IRS, arguing that these rules are unconstitutional. Once the rules kick in, which will happen in 2027, brokers will be required to report taxpayer information and gross proceeds of crypto sales.

What does this mean for crypto markets?

Short-term outlook

In the interim, this pause means that the crypto market will remain stable. The postponement of the FIFO requirement is a sigh of relief as crypto brokers and taxpayers get time to adjust.

Long-term outlook

On the flip side, once these regulations take, it will provide substantial regulatory certainty, which would stabilize things in the market.

How does this update affect the broader cryptocurrency landscape?

Impact on hyperinflationary economies

In hyperinflationary countries, it could create an environment more favorable to crypto use. If the IRS has proposed rules like this, others may follow suit, thereby providing more clarity and stability.

Challenges to broader adoption

However, regulatory clarity doesn’t substitute for practicality. The primary issues hindering usage remain the same—scalability, transaction fees, and access barriers.

Increases in market disparity?

The delay makes things worse for smaller investors, as established businesses that have the resources would probably be better equipped to acclimate to the upcoming changes in rules, increasing market inequality.

What is the conclusion?

This temporary update concerning the IRS cost-basis method will allow many businesses and individuals to breathe easier, but it also ushers in more uncertainty.