IRS extends relief for crypto brokers

The Internal Revenue Service issued a notice Wednesday extending temporary relief for another year on using alternative methods for brokers of digital assets, such as cryptocurrency.

Notice 2026-20 extends the temporary relief provided last January under Notice 2025-7 for an additional year. The notice allows eligible taxpayers to use certain alternative methods for making an adequate identification with respect to units of a digital asset held in the custody of a broker that are sold, disposed of or transferred during the relief period specified in the new notice. 

In July 2024, the Treasury and the IRS published final regulations on rules for determining which units of the same digital asset should be treated as sold, disposed of or transferred when a taxpayer holds multiple units of that same digital asset within the same wallet that were acquired on different dates or at different prices. It generally applies separate rules depending on whether or not the units are held by the taxpayer in the custody of a broker.

For digital asset units held in the custody of a taxpayer's broker, the regulations generally allow a taxpayer to make an adequate identification of the units to be sold, disposed of, or transferred. Adequate identification is made if, no later than the date and time of the sale, disposition, or transfer, the taxpayer specifies to the custodial broker with custody of the digital assets the particular units of the digital asset to be sold, disposed of, or transferred. Taxpayers can identify units by reference to any identifier, such as purchase date and time or purchase price, that the broker designates as sufficiently specific to identify the units sold, disposed of, or transferred. The rules also allow taxpayers to make an adequate identification of such units by using a standing order or instruction communicated to their custodial broker. If the custodial broker offers taxpayers only one method of making a specific identification — for example, by the earliest date on which units of the same digital asset were acquired, the latest date on which units of the same digital asset were acquired, or the highest basis — the regulations treat that method as a standing order or instruction.

For units held in the custody of a broker for which the taxpayer does not make an adequate identification of the units sold, disposed of or transferred, the rules treat such units as sold, disposed of or transferred in order of time from the earliest date on which units of that same digital asset held in the custody of the broker were acquired by the taxpayer under the FIFO rule.  Regardless of whether the taxpayer makes an adequate identification, in the case of digital assets exchanged for different digital assets, the rules deem any units withheld, either for the broker's backup withholding obligations or for the digital asset transaction costs, as coming from the units received in the exchange. Separate ordering rules prescribe how units not held in the custody of a broker are identified as the units sold, disposed of or transferred. 

The IRS also at the time issued Rev. Proc. 2024-28, which provides guidance to taxpayers on how to transition from a universal or multi-wallet basis allocation methodology to a wallet-by-wallet or account-by-account basis allocation methodology.  Subject to certain requirements, Rev. Proc. 2024-28 offers a safe harbor for taxpayers to allocate their units of unattached basis in digital assets acquired before Jan. 1, 2025, to a digital asset wallet or account that holds the same number of remaining digital asset units based on the taxpayer's records of such unattached basis and remaining units so long as the allocation is reasonable. 

Rev. Proc. 2024-28 allows taxpayers either to make a specific unit allocation or to make a global allocation in order to allocate units of unattached basis, subject to various conditions.  For each type of digital asset, the allocation generally is required to be completed by the date of the first sale of that type of digital asset on or after Jan. 1, 2025.

In response to concerns expressed by some custodial brokers, the IRS issued Notice 2025-7, which temporarily allows taxpayers to use additional methods for making an adequate identification within the meaning of Section 1.1012-1(j)(3)(ii) of the Tax Code.  Notice 2025-7 provides that, during calendar year 2025, which the notice refers to as the relief period, taxpayers can make adequate identifications of units of digital assets sold, disposed of, or transferred from the taxpayer's units held in the custody of a broker by identifying the particular units or recording a standing order in the taxpayer's books and records, temporarily relieving taxpayers of the requirement to communicate identifications to the broker. The notice also says that if a taxpayer makes an adequate identification under the notice, the rule which treats taxpayers whose broker offers only one method of making a specific identification as having made a standing order or instruction, does not apply.  Taxpayers relying on the safe harbor under Rev. Proc. 2024-28 can rely on the temporary relief in the notice only after the requirements of Rev. Proc. 2024-28 have been satisfied.  The temporary relief described in Notice 2025-7 does not apply to digital asset units not held in the custody of a broker.

Some digital asset custodial brokers have informed the Treasury and the IRS that they have built and implemented systems and procedures to report gross proceeds for digital asset transactions carried out in 2025 and will report those transactions to the IRS and customers in 2026, and that those brokers also have made good faith efforts to build and implement systems and procedures that will enable those brokers to accept and process specific identification or standing order instructions from customers in 2026.  The Treasury and the IRS said they understand that many custodial brokers have substantially completed much of the work necessary to accept specific identifications from customers but are not currently ready to accept specific identifications (other than standing orders) from customers. Despite the temporary relief provided in Notice 2025-7, some of those custodial brokers don't yet have in place the technology needed to accept specific instructions communicated by taxpayers but are expected to complete building and implementing the systems necessary to do so during 2026. 

Therefore, some taxpayers may be temporarily unable to make adequate identifications in conformity with Section 1.1012-1(j)(3)(ii), with the result that any units in the custody of such brokers that are sold, disposed of, or transferred before the necessary systems are in place would be determined under the FIFO rule without further temporary relief.  To avoid this result, the new notice extends the relief period specified in Notice 2025-7 through Dec. 31, 2026.

However, as with the temporary relief provided in Notice 2025-7, the temporary relief described in the notice does not apply for purposes of the information reporting rules for digital assets. "For 2026 transactions, the acquisition date and basis reported by a broker to a taxpayer with respect to a sale, disposition or transfer of digital assets may not match the lot identification and basis of that sale, disposition or transfer on the taxpayer's books and records," said the notice. "Similarly, as with the temporary relief provided in Notice 2025-7, the relief provided under this notice does not apply to digital asset units not held in the custody of a broker."