By Bitwave 
Introduction
The Internal Revenue Service (IRS) has recently provided a temporary relief to cryptocurrency holders on centralized exchanges by allowing them to default to HIFO or Spec ID accounting methods instead of the standard FIFO method. This decision aims to prevent tax exploitation during market fluctuations, particularly in bull markets where selling older, cheaper assets could result in significant capital gains.
Background
The IRS initially ruled that if crypto investors do not select their preferred accounting method (e.g., HIFO or Spec ID), their brokers would default to using FIFO for reporting sales. FIFO, or First In, First Out, is the standard method for calculating capital gains in the U.S. It assumes that the oldest cryptocurrency purchased is sold first, thereby increasing taxable income.
Relaxation of the Rule
The IRS has now relaxed this rule, allowing crypto holders to choose their preferred accounting method. This change comes into effect until December 31, 2025, providing brokers with time to implement these changes smoothly.
Why the Change?
Cointracker’s Shehan Chandrasekera, head of tax, stated that imposing FIFO immediately could have been disastrous for crypto taxpayers during a bull market. "Investors might unintentionally sell their earliest purchased assets — those with the lowest cost basis — first, thereby unknowingly maximizing their capital gains."
Crypto Commentator’s Perspective
Mark Thomas, a crypto commentator, added that the one-time application of FIFO can be advantageous in specific scenarios. For instance, if a sale occurs more than one year after the earliest crypto purchased but before the latest crypto bought, FIFO would result in long-term capital gains rather than short-term.
Temporary Relief and Its Impact
The temporary relief applies to sales on centralized crypto exchanges until December 31, 2025. This period allows brokers to transition to supporting all accounting methods without forcing users to switch their approach.
Blockchain Association’s Legal Challenge
The IRS update comes just days after the Blockchain Association and the Texas Blockchain Council filed a lawsuit against the agency. The lawsuit argues that the rules requiring brokers to report digital asset transactions are unconstitutional. Once these rules take effect in 2027, brokers will be required to disclose taxpayer information and report their gross proceeds from crypto sales.
Market Implications
Crypto taxpayers now have more flexibility to manage their capital gains by choosing an accounting method that better suits their tax situation. This change is particularly beneficial during periods of market volatility, as it prevents unintended selling of older, lower-cost assets during a bull market.
Legal and Regulatory Context
The IRS’s decision to relax the FIFO rule highlights ongoing challenges in aligning cryptocurrency taxation with traditional financial regulations. The temporary relief aims to address the unique challenges posed by decentralized finance (DeFi) platforms and stablecoins.
Conclusion
The IRS’s relaxation of its crypto accounting rules represents a significant step toward streamlining cryptocurrency taxation. By providing investors with more control over their capital gains reporting, this change seeks to balance regulatory certainty with individual tax optimization strategies.
# The IRS Relaxation of Crypto Accounting Rules
## Introduction
The Internal Revenue Service (IRS) has recently provided a temporary relief to cryptocurrency holders on centralized exchanges by allowing them to default to HIFO or Spec ID accounting methods instead of the standard FIFO method. This decision aims to prevent tax exploitation during market fluctuations, particularly in bull markets where selling older, cheaper assets could result in significant capital gains.
### Background
The IRS initially ruled that if crypto investors do not select their preferred accounting method (e.g., HIFO or Spec ID), their brokers would default to using FIFO for reporting sales. FIFO, or First In, First Out, is the standard method for calculating capital gains in the U.S. It assumes that the oldest cryptocurrency purchased is sold first, thereby increasing taxable income.
### Relaxation of the Rule
The IRS has now relaxed this rule, allowing crypto holders to choose their preferred accounting method. This change comes into effect until December 31, 2025, providing brokers with time to implement these changes smoothly.
#### Why the Change?
**Cointracker's Shehan Chandrasekera**, head of tax, stated that imposing FIFO immediately could have been disastrous for crypto taxpayers during a bull market. "Investors might unintentionally sell their earliest purchased assets — those with the lowest cost basis — first, thereby unknowingly maximizing their capital gains."
#### Crypto Commentator's Perspective
**Mark Thomas**, a crypto commentator, added that the one-time application of FIFO can be advantageous in specific scenarios. For instance, if a sale occurs more than one year after the earliest crypto purchased but before the latest crypto bought, FIFO would result in long-term capital gains rather than short-term.
### Temporary Relief and Its Impact
The temporary relief applies to sales on centralized crypto exchanges until December 31, 2025. This period allows brokers to transition to supporting all accounting methods without forcing users to switch their approach.
#### Blockchain Association's Legal Challenge
The IRS update comes just days after the **Blockchain Association** and the **Texas Blockchain Council** filed a lawsuit against the agency. The lawsuit argues that the rules requiring brokers to report digital asset transactions are unconstitutional. Once these rules take effect in 2027, brokers will be required to disclose taxpayer information and report their gross proceeds from crypto sales.
### Market Implications
Crypto taxpayers now have more flexibility to manage their capital gains by choosing an accounting method that better suits their tax situation. This change is particularly beneficial during periods of market volatility, as it prevents unintended selling of older, lower-cost assets during a bull market.
### Legal and Regulatory Context
The IRS's decision to relax the FIFO rule highlights ongoing challenges in aligning cryptocurrency taxation with traditional financial regulations. The temporary relief aims to address the unique challenges posed by decentralized finance (DeFi) platforms and stablecoins.
### Conclusion
The IRS's relaxation of its crypto accounting rules represents a significant step toward streamlining cryptocurrency taxation. By providing investors with more control over their capital gains reporting, this change seeks to balance regulatory certainty with individual tax optimization strategies.