Temporary Relief for Taxpayers and Brokers Handling Digital Assets: IRS Notice 2025-7
January 16, 2025
The IRS has issued Notice 2025-7, providing temporary relief for eligible taxpayers involved in the sale, transfer, or disposal of digital assets held by brokers. This relief period, running from January 1, 2025, to December 31, 2025, addresses technology limitations that may prevent certain brokers from accepting specific identification instructions for digital asset transactions. As a result, taxpayers may face difficulties when trying to identify units of a digital asset for tax reporting purposes. To mitigate this, the IRS has allowed taxpayers to use alternative identification methods during the relief period.
Technology Challenges and FIFO Default
By January 1, 2025, some digital asset brokers may not have the necessary systems in place to process specific instructions from taxpayers about which assets to sell or transfer. These limitations may leave some taxpayers unable to make the required identifications, thus defaulting to the FIFO (First-In, First-Out) method for determining which units are sold, transferred, or disposed of.
Alternative Methods of Identification
To provide relief, the IRS allows taxpayers to use alternative methods of identification during the relief period. Taxpayers may identify the particular units being sold, transferred, or disposed of by referencing information such as the purchase date or price in their books and records at the time of the transaction. Alternatively, taxpayers can record a standing order in their records, specifying the assets to be sold or transferred, as long as this order is made before the transaction occurs and includes sufficient details for identification.
Safe Harbor and Application Scope
This temporary relief does not interfere with the safe harbor provisions described in Rev. Proc. 2024-28. Taxpayers who rely on this safe harbor may also benefit from the temporary relief, provided they meet the relevant conditions of that procedure. For instance, in cases involving global allocations, taxpayers must complete the global allocation process before relying on the relief. It is important to note that the relief only applies to digital assets held in the custody of brokers. The relief applies to all digital asset transactions, including acquisitions, disposals, and transfers, conducted during the 2025 relief period.
Duration and Limitations
The temporary relief is available only for the duration of the relief period, from January 1, 2025, to December 31, 2025. After the relief period ends, taxpayers must revert to standard identification methods, as prescribed under IRS regulations. The relief aims to assist taxpayers and brokers during this transitional phase, as they adapt to evolving systems and regulations for digital asset reporting.
Conclusion
IRS Notice 2025-7 provides essential temporary relief to taxpayers facing challenges in identifying digital asset units for tax purposes due to technological limitations by brokers. The relief allows for alternative identification methods, ensuring taxpayers can continue to report their digital asset transactions accurately during the relief period. However, the relief will expire at the end of 2025, and taxpayers must adhere to regular identification rules thereafter.