The Internal Revenue Service (IRS) is suspending the implementation of new tax rules that will affect investors who hold crypto assets in centralized exchanges.
On July 9th, 2024, the Treasury Department and the IRS published the final rules for determining the order of selling crypto assets held in centralized finance (CeFi) platforms.
Investors should choose an accounting method such as the Highest-In, First-Out (HIFO) or the Specific Identification (Spec ID) if their assets are held with a CeFi broker. Otherwise, the First-In, First-Out (FIFO) applies, which means that the earliest acquired unit of a cryptocurrency will be sold first.
The rule is supposed to take effect on January 1st, 2025 but CoinTracker head of Tax Strategy Shehan Chandrasekera says the IRS recognized the problem that almost all CeFi brokers are not yet ready to support Spec ID, prompting the tax agency to postpone the implementation of the rule by one year.
Reads the temporary relief notice issued by the IRS on December 31st,
“The Treasury Department and the IRS understand that some digital asset brokers may not have in place, by January 1, 2025, the technology needed to accept specific instructions or standing orders communicated by taxpayers. These technology limitations may leave some taxpayers unable to make adequate identifications in conformity with § 1.1012-1(j)(3)(ii).”
Chandrasekera says many crypto investors could suffer losses if the new tax rules were enforced.
“This meant that you had no option other than selling your CeFi assets under FIFO starting 1/1/25.
In a bull market environment, this could have been disastrous for many taxpayers because you’d be unintentionally selling the earliest purchased asset (which tends to have the lowest cost basis) first, while unknowingly maximizing your capital gains.”
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