The IRS Provides Temporary Relief for Cryptocurrency Tax Reporting for the Year 2025

The Internal Revenue Service (IRS) has recently announced a temporary relief measure aimed at cryptocurrency holders using Centralized Exchanges (CEX). This initiative allows these users to adopt a flexible asset accounting method, exempting them from the strict First In, First Out (FIFO) tax obligations typically associated with digital asset transactions.

The new regulation, effective from January 1, 2025 to December 31, 2025, allows CeFi exchange users to determine the specific value of the Cryptocurrency sold using their own records or tax software. This marks a significant departure from the traditional FIFO method, which requires taxpayers to sell the oldest assets first.

FIFO (First In, First Out), also known as 'First In, First Out', is the default method for calculating capital gains tax in the United States. It is calculated by assuming that the oldest cryptocurrency is sold first.

A Cryptocurrency tax official described that if taxpayers of Cryptocurrency follow the FIFO rules of the US Internal Revenue Service during a bull market, it would be "disastrous". If investors sell their earliest purchased assets (i.e., those with potentially the lowest cost basis) first, they will "unwittingly maximize their capital gains", boosting taxpayers' capital gains.

The latest temporary exemption policy of the IRS in the United States aims to alleviate the high tax burden associated with strict FIFO rules, allowing Crypto Asset holders to have greater flexibility in reporting and tracking the sale of their digital assets. However, it is important to note that this relief measure is temporary and only applies to the designated period in 2025.

The IRS regards Cryptocurrency as properties similar to stocks and levies two main types of taxes on Cryptocurrency transactions:

• Capital gains tax: applicable to trading activities. - Income tax: applicable to rewards or earnings, such as mining, staking, interest, or any other form of income.

The final regulations on cryptocurrency tax reporting by the US Internal Revenue Service are of significant importance to the industry.

1. Broker Definition: The IRS has narrowed the definition of 'broker' to exclude participants in non-custodial industries, such as decentralized exchanges and non-custodial digital asset wallet providers. 2. Reporting Requirements: Service providers with custodial wallets and payment processors facilitating cryptocurrency transactions will be treated as brokers for US federal tax purposes. 3. Stablecoin Issuers: Stablecoin issuers who exchange stablecoins for cash will also be treated as brokers. 4. Non-U.S. Brokers: Non-U.S. brokers (excluding foreign partnerships controlled by U.S. persons) are exempt from U.S. cryptocurrency tax reporting requirements.

The IRS is still studying whether non-custodial platforms should bear reporting responsibilities. The final regulations narrowed the reporting rules for payment data and application providers (PDAP), and excluded digital asset loans from information reporting, although this exemption may change in the future.

Despite the temporary exemption policy provided by the US Internal Revenue Service for CeFi users, the requirement for DeFi brokers to report user transaction data has still sparked controversy.

Three Cryptocurrency industry groups in the United States, including the 'DeFi Education Fund,' 'The Blockchain Association,' and the 'Texas Blockchain Council,' have filed a lawsuit against the IRS to block its new requirement for decentralized finance (DeFi) entities or institutions to report customer information.

This controversial regulation is expected to take effect in 2027, at which time some DeFi front-end operators will be required to collect users' personal information and transaction history.

The U.S. Internal Revenue Service has provided temporary relief for cryptocurrency tax reporting for the year 2025, according to an article published in Blockcast.