IRS Issues Temporary Crypto Tax Relief That May Create Reporting Discrepancies in 2025

WASHINGTON — The Internal Revenue Service has finalized sweeping new tax reporting regulations for digital assets and, in a related move, issued temporary relief for the 2025 tax year that could create significant discrepancies between taxpayer records and new forms filed by cryptocurrency brokers. The relief, detailed in IRS Notice 2025-7, allows taxpayers to use their own internal accounting methods to identify the cost basis of assets sold, even if their broker defaults to a different method on the newly introduced Form 1099-DA. Beginning with transactions in 2025, brokers such as cryptocurrency exchanges will be required to issue Form 1099-DA to both taxpayers and the IRS, reporting the proceeds from digital asset sales. This brings crypto reporting in line with traditional securities like stocks. A critical component of this reporting is the cost basis—the original purchase price of an asset—which determines the taxable capital gain or loss. The temporary relief addresses how this basis is identified, giving taxpayers a one-year reprieve from stricter proposed rules that would have required them to provide specific instructions to their broker for every single trade. In our experience, this temporary relief is a double-edged sword for the small and mid-sized businesses we serve. While the flexibility to choose a cost-basis method like specific identification on internal records is beneficial for tax optimization, it sets a potential trap. If a company’s internal ledger shows a sale of specific high-cost crypto units to minimize gains, but their exchange’s 1099-DA reports the sale using a default first-in, first-out (FIFO) method, it creates a mismatch that the IRS will see immediately. This discrepancy is a clear flag for an audit, placing the burden of proof squarely on the business to defend its position with immaculate documentation. This is precisely the kind of complex situation where professional guidance is no longer optional. The new environment demands a proactive and rigorous approach to record-keeping that many businesses are not prepared for. Reconciling these different versions of the same trade requires careful planning throughout the year, not just a scramble at tax time. For businesses navigating these new digital asset rules, the most critical service is now tax preparation and compliance. To ensure your records are audit-ready and aligned with your tax strategy, contact C&S Finance Group LLC at csfinancegroup.com to get started. Under the temporary relief outlined in IRS guidance, taxpayers have two primary ways to identify which specific units of a digital asset are being sold during 2025. First, they can specify the units on their own books and records at the time of the sale, using an identifier like the purchase date or price. Second, they can establish a standing order with their broker, such as instructing them to always sell the units with the highest cost basis first (HIFO) or the most recently acquired units first (LIFO). This guidance directly addresses a key concern for traders. According to IRS frequently asked questions, if a broker only offers one default accounting method, such as FIFO, a taxpayer is not required to use it for their 2025 return. They may still use their own adequate identification method internally. The result is that the taxpayer’s Form 8949, where capital gains and losses are detailed, may report a different gain or loss than what is suggested by the gross proceeds and default basis on the broker-issued Form 1099-DA. Taxpayers will then need to make adjustments on their tax return to reconcile the difference, a process that requires meticulous documentation. The final regulations also clarify other complex areas of digital asset taxation. To prevent redundant filings, the rules aim to mitigate “cascading reporting,” where multiple brokers in a single transaction chain would have been required to file a 1099-DA. A forthcoming revision to Form W-9 will allow one broker to certify it is handling the reporting, relieving others in the chain of the obligation. The regulations also establish a clear hierarchy for assets with dual classifications; for instance, a transaction involving an asset that is both a digital asset and a security will be reported solely under the new digital asset rules. Furthermore, the rules clarify that stablecoins are to be treated as digital assets, not dual-classification assets. Reporting for derivatives like options and forward contracts will depend on whether the contract itself is traded on a blockchain, not on the underlying asset. However, if a non-blockchain-traded derivative is physically settled with cryptocurrency, that settlement will trigger digital asset reporting requirements. With the implementation of Form 1099-DA, the IRS will have unprecedented access to transaction-level data, allowing the agency to cross-reference information from brokers against individual and business tax returns. This heightened scrutiny makes accurate record-keeping essential for any entity transacting in crypto. Taxable events are broadly defined and include not only selling crypto for U.S. dollars but also trading one cryptocurrency for another, spending crypto on goods and services, and earning it through activities like staking or mining. As businesses and investors prepare for these changes, they should note that the cost-basis relief is temporary and applies only to the 2025 tax year. This period should be used to implement robust accounting and record-keeping systems in anticipation of potentially stricter rules in 2026 and beyond. Taxpayers should also remain aware of ongoing legislative discussions that could impact digital asset taxation, including proposals to apply the “wash sale” rule, which currently prohibits claiming a loss on a security sold and repurchased within 30 days, to cryptocurrency.