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Crypto Investors Catch a Break: IRS Postpones Controversial Reporting Rules

A Temporary Reprieve for Crypto Enthusiasts

The Internal Revenue Service (IRS) has granted a temporary stay of execution for crypto investors, putting the brakes on new reporting rules that would have forced a default accounting method for crypto transactions on centralized exchanges. Initially slated to take effect in 2024, the rules would have required investors to adopt the FIFO (First In, First Out) method to calculate capital gains, unless they opted for an alternative approach.

The FIFO Conundrum

Under the FIFO method, the oldest assets are considered sold first, which can lead to a significant increase in capital gains for taxpayers. Critics, including Shehan Chandrasekera, head of tax at Cointracker, warned that the hasty implementation of these rules could have devastating consequences for investors during market upswings. Chandrasekera pointed out that investors might inadvertently sell their earliest purchased assets, which typically have the lowest cost basis, resulting in higher capital gains taxes.

A Welcome Extension

The IRS has now pushed back the automatic application of the FIFO rule until December 31, 2025, giving investors a temporary reprieve. This extension allows investors to maintain their own accounting records until that date, while also providing brokers with sufficient time to adapt their systems to support various accounting methods, such as HIFO (Highest In, First Out) and Specific Identification.

A Legal Challenge on the Horizon

In a related development, the Blockchain Association and the Texas Blockchain Council have filed a lawsuit against the IRS, contesting the constitutionality of new rules requiring brokers to report digital asset transactions. These rules, set to be enforced in 2027, will compel brokers to disclose taxpayer information and report gross proceeds from crypto sales. As the crypto landscape continues to evolve, investors can breathe a sigh of relief, knowing they have a temporary reprieve from the FIFO rule. However, the legal battle ahead will undoubtedly shape the future of crypto regulation.