IRS Crypto Tax Reporting Requirements Stir up Mass Confusion

IRS Crypto Tax Reporting Requirements Stir up Mass Confusion

Recent announcements by the IRS regarding crypto tax reporting requirements have sparked widespread confusion within the crypto community. Although the agency extended the timeline for centralized crypto exchanges (CEXs) to upgrade their systems, the reporting requirements remain firmly in place.

IRS Grants Crypto Exchanges More Time to Implement Platform Upgrades

The confusion began when the IRS announced on New Year’s Eve that CEXs would have until the end of 2025 to upgrade their platforms to meet new reporting requirements. These updates aim to enable users to properly identify the cost basis for their cryptocurrency holdings, a critical factor for calculating capital gains.

This follows IRS guidance issued in June 2024, which mandates that exchanges track crypto holdings on a wallet-by-wallet or account-by-account basis, instead of treating all assets as part of a single pot. Taxpayers are required to accurately determine the purchase price of their crypto to calculate capital gains; otherwise, exchanges may default to using the first in, first out (FIFO) accounting method. FIFO can increase a user’s taxable gains if older assets, with lower purchase prices, are assumed to be sold first.

Some exchanges, however, were unable to implement these upgrades by the original December 31, 2024, deadline. The IRS’s grace period ensures that exchanges have additional time to comply, but the core requirements remain unchanged.

Misinterpretation of the Grace Period

Some crypto users and media outlets misunderstood the IRS’s announcement, assuming that the wallet-by-wallet reporting requirements had also been delayed. David Kemmerer, co-founder and CEO of crypto tax software provider CoinLedger, clarified the situation, stating, “No, the IRS did not delay tax reporting for investors until 2026. Rather, IRS Notice 2025-7 states that users of centralized exchanges can still use a specific ID accounting method when calculating gains and losses for 2025.”

Although exchanges may default to FIFO in 2025, taxpayers still retain the flexibility to choose other accounting methods, such as last in, first out (LIFO) or highest in, first out (HIFO), to minimize their capital gains liability. This choice can be made individually when filing taxes, though it would be preferable to have the technology in place to select the method prior to asset sales.

Additional IRS Regulations on DeFi and Brokers

The IRS recently introduced new regulations classifying decentralized finance (DeFi) platforms as brokers. This further complicates compliance for both users and companies, adding to the regulatory burden in an already complex ecosystem.

“The IRS keeps coming out with more and more confusing guidance, it seems like every day,” Kemmerer remarked. While acknowledging the agency’s attempts to address community concerns, he also highlighted the challenges of transitioning to the IRS’s preferred reporting methods.

“It’s going to be a painful transition,” Kemmerer noted, “but the IRS is working with the community to smooth the process.”

Looking Ahead

The evolving crypto tax regulations underline the importance of staying informed and compliant. While the extended timeline offers temporary relief, both exchanges and users must prepare for stricter reporting requirements and seek tools to simplify the process. As the crypto ecosystem grows, clarity and adaptability will be key to navigating these regulatory challenges.