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The Internal Revenue Service (IRS) issued temporary relief on crypto cost-basis reporting rules, potentially averting increased tax liabilities for digital asset investors.

The decision reflects the agency’s recognition of the complexities in crypto taxation and the need for regulatory adaptability in response to evolving markets.

The relief postpones the implementation of a rule that would have mandated centralized crypto exchanges to default to the First In, First Out (FIFO) accounting method for capital gains calculations. FIFO typically assumes the oldest assets are sold first, often leading to higher taxable gains during market upswings.

This extension will remain in place until Dec. 31, 2025, allowing brokers additional time to accommodate various accounting methods.

Investor concerns centered around the potential for inflated tax bills, as FIFO could force the sale of assets purchased at lower prices, increasing gains. Shehan Chandrasekera, Cointracker’s head of tax, cautioned that the immediate application of FIFO could disproportionately affect crypto taxpayers, potentially triggering substantial tax burdens.

During the relief period, taxpayers can opt for accounting methods such as Highest In, First Out (HIFO), or Specific Identification (Spec ID). These alternatives empower investors to select assets to sell, offering flexibility and potentially mitigating tax exposure.

The IRS’s announcement coincides with heightened legal and industry scrutiny over the agency’s evolving approach to digital asset taxation. On Dec. 28, the Blockchain Association and the Texas Blockchain Council filed a lawsuit contesting the IRS’s expanded reporting requirements.

The lawsuit challenges the mandate for brokers to report all digital asset transactions, including those conducted on decentralized exchanges (DEXs), arguing that the regulations overstep constitutional bounds.

Critics of the IRS’s broadened rules claim they exceed the agency’s authority and impose undue burdens on market participants. Under the expanded framework, scheduled to take effect in 2027, brokers will be obligated to report taxpayer information and disclose gross proceeds from crypto transactions.

The temporary relief highlights the IRS’s acknowledgment of the crypto markets’ volatile nature and investors’ varied strategies. Observers see the decision as a necessary step toward balancing regulatory oversight with the crypto industry’s operational realities.

Market participants widely view the delay as a constructive development, allowing more time for industry adaptation and compliance.

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