Confusion ran rampant on Thursday after several publications posted ambiguous headlines regarding a recent IRS announcement that gives centralized crypto exchanges (CEXs) an additional year to upgrade their systems so users can properly identify the cost basis for their crypto.
In June 2024, the IRS issued guidance that requires exchanges to identify crypto on an account-by-account or wallet-by-wallet basis rather than treating it as if it were all held in a single pot.
Taxpayers are also required to accurately identify the cost basis or purchase price for their crypto prior to selling it, in order to properly calculate any capital gains, otherwise, exchanges can assume that customers are selling the oldest assets first – an accounting method called first in, first out (FIFO).
There’s only one problem – some exchanges weren’t able to upgrade their systems with the necessary functionality needed to comply with the aforementioned guidelines by the December 31st deadline stipulated by the IRS, forcing the agency to push the requirement back by a full year.
It appears when the IRS announced this grace period on New Year’s Eve, some crypto users and publications wrongly assumed the wallet-by-wallet or account-by-account reporting requirements were also being pushed back.
(David Kemmerer / X)
“No, the IRS did not delay tax reporting for investors until 2026,” said David Kemmerer, co-founder and CEO of crypto tax software provider Coin Ledger. “Rather, IRS Notice 2025-7 states that the users of centralized exchanges can still use a specific ID accounting method when calculating gains and losses for 2025.”
In an interview with Bitcoin.com, Kemmerer further explained that while exchanges can default to a FIFO method this year, which could increase tax liability for their customers, users are still able to individuality select the most tax efficient accounting method, such as last in, first out (LIFO) or highest in, first out (HIFO) to minimize their reported capital gains when they file their 2024 taxes in April.
“The taxpayer still has flexibility to use a FIFO, LIFO or a HIFO method on a per account basis,” Kemmerer explained. “And then next year, when hopefully Coinbase and all these other exchanges have implemented this technology, you’ll be able to actually do that prior to the sale, versus doing it on your own when you file your taxes.”
Just a few days prior to this latest announcement, the IRS published new regulations classifying front-facing decentralized finance (defi) services as brokers, further adding to the regulatory burden shouldered by crypto users and companies, and increasing confusion and uncertainty in the ecosystem.
“The IRS keeps coming out with more and more confusing guidance, it seems like every day,” Kemmerer said, while also acknowledging that the agency is at least yielding to some of the crypto community’s concerns.
“It’s going to be a painful transition to how the IRS wants reporting to happen.” Kemmerer explained. “And I think they are working with people to try to smooth that transition.”
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