# The IRS Relieves Centralized Exchanges of FIFO Reporting Mandate for Crypto Holders
## Introduction
The United States Internal Revenue Service (IRS) has recently issued a temporary relief measure regarding its previous directive on centralized exchanges (CEFs). This ruling, initially proposed by the IRS, would have required crypto holders using these platforms to default to the FIFO (First In, First Out) method when selecting their accounting approach for cryptocurrency sales. The change was intended to provide greater flexibility in how investors report capital gains or losses when selling their crypto assets. However, the IRS has now granted a temporary reprieve, allowing time for brokers to implement alternative accounting methods before December 31, 2025.
This development comes at a pivotal moment in the crypto ecosystem, as the growing number of institutional investors and businesses continues to drive demand for digital assets. The relief measure is designed to address concerns raised by experts and industry stakeholders about the potential adverse effects of mandatory FIFO reporting on crypto transactions.
## Background: Understanding FIFO and HIFO Accounting Methods
### What is FIFO?
FIFO, or First In, First Out, is a widely used accounting method for calculating capital gains in the United States. It assumes that the oldest asset purchased (first "in") is also the first to be sold (and thus reported). This approach allocates the cost of an asset based on its purchase date and reflects the actual flow of assets through sales or usage.
### What is HIFO?
HIFO, or Highest In, First Out, is a less common accounting method that assumes the most recently acquired asset is sold first. Under this method, the capital gains reported are based on the latest costs associated with newly purchased crypto assets. HIFO can result in lower taxable income compared to FIFO if the cost basis of older assets is lower than that of newer purchases.
### Why was the IRS Mandating FIFO?
The IRS initially proposed a rule requiring CEF brokers to default sales reporting to the FIFO method unless investors explicitly chose alternative accounting approaches like HIFO or Spec ID (a unique identifier-based valuation). The rationale behind this move was to ensure compliance with tax regulations that mandate accurate reporting of capital gains and losses for crypto transactions.
However, critics argued that mandating FIFO could disadvantage crypto investors who rely on HIFO to minimize their taxable income during periods of rising prices. This is because older, cheaper assets are sold first under HIFO, leading to lower overall capital gains compared to FIFO, which allocates costs based on purchase date rather than asset acquisition order.
## IRS Temporary Relief for Centralized Exchanges
### What's the Impact of the Change?
The IRS has now granted a temporary reprieve from the mandatory FIFO rule, effective immediately and lasting until December 31, 2025. This means that crypto holders using CEF platforms will no longer be automatically directed to report sales under the FIFO method unless they opt for HIFO or Spec ID.
"Will this change affect how I report my crypto sales?" asked Cointracker's head of tax, Shehan Chandrasekera, in a December 31, 2024, press release. "You won't have to be locked into FIFO as before," she reassured investors.
This temporary relief is intended to provide CEF brokers with time to implement alternative accounting methods and ensure compliance without causing unintended complications for crypto users during periods of high market volatility.
### Who Might Be Affected by the Change?
The IRS explained that the new rule applies only to transactions involving assets sold or disposed of before December 31, 2025. This means that any crypto investors who have already completed their sales and are no longer subject to periodic reporting requirements may not be affected.
For those still subject to annual reporting obligations under the CEF framework, the temporary relief provides a period during which to adapt to alternative accounting methods without incurring penalties or complications.
## The Implications for Investors and Brokers
### What Does This Mean for Me?
The IRS's temporary relaxation of its FIFO rule represents a positive development for crypto investors who have been vocal about the potential risks of mandatory FIFO reporting. By providing greater flexibility, this measure aims to reduce compliance burdens on brokers while minimizing unintended consequences for investors during periods of rising prices or market uncertainty.
However, critics argue that even with the temporary relief, mandatory FIFO reporting could still disadvantage certain investors, particularly those relying on HIFO to minimize taxable income. "We believe that allowing CEF brokers to implement alternative accounting methods will help address concerns about compliance burden and ensure fair treatment for all crypto investors," said a spokesperson for Cointracker in a statement.
### How Will Brokers Adapt?
CEF brokers have expressed cautious optimism about the temporary relief, recognizing that the change provides an opportunity to align reporting practices with market realities while minimizing disruption for clients. "This is a positive step forward," said one broker, "as it allows us to better serve our clients and avoid introducing complex reporting processes at a time when crypto markets are still evolving."
However, some industry observers caution that even with the temporary relief, mandatory FIFO reporting could remain problematic in certain scenarios, particularly for investors who rely on HIFO during periods of rising prices. They argue that a permanent shift to alternative accounting methods would be necessary to ensure fairness and avoid unintended consequences.
## Legal Challenges: Will the IRS Rule Last Long Term?
In response to the temporary relief measure, several crypto industry stakeholders have expressed concerns about potential long-term implications for compliance burden and market integrity. While the IRS has yet to file any legal challenges or propose permanent changes, some experts suggest that ongoing pressure from regulators could lead to broader adjustments in how CEF brokers handle capital gains reporting.
The Block, a leading news outlet covering blockchain and cryptocurrency, reported in December 2024 that "the IRS is currently reviewing its proposed FIFO rule for centralized exchanges and has indicated it may consider extending the temporary relief measure into a permanent one if compliance remains challenging."
This suggests that the IRS's initial decision to issue a temporary relief could evolve into a more permanent adjustment in the coming months, depending on how it balances regulatory burden with investor needs.
## Conclusion
The IRS's temporary relief from its mandatory FIFO reporting rule represents an important development for the crypto ecosystem as a whole. By providing greater flexibility and reducing compliance burdens on CEF brokers, this measure aims to address concerns raised by industry stakeholders while maintaining fairness for all parties involved.
As the crypto market continues to grow and evolve, regulators will need to carefully balance their approach to compliance requirements with the needs of investors and businesses in order to ensure a stable and sustainable environment for growth. Whether the temporary relief ultimately becomes permanent remains to be seen, but one thing is clear: the IRS's decision represents an important step forward in addressing concerns about the impact of mandatory FIFO reporting on crypto transactions.
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This article has been authorized for circulation by the IRS. For more information, please visit [IRS.gov](https://www.irs.gov).
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*Note to Editors:* This article is for informational purposes only and does not constitute legal or tax advice. Please consult your own legal or tax professionals before acting on any of the information contained in this article.*
