IRS Extends Crypto Cost-Basis Relief Through 2026

Quick answer: the IRS extended a temporary accommodation that lets crypto investors avoid getting forced into the FIFO (first-in, first-out) accounting method when they sell digital assets held at a broker. IRS Notice 2026-20, issued this year, pushes that relief through December 31, 2026, giving investors more runway to identify specific “lots” of crypto instead of automatically selling their oldest, usually most-appreciated coins first. Separately, Form 1099-DA — the new digital-asset version of the 1099-B your broker already sends for stock sales — is being phased in over two tax years. For 2025 sales, brokers only had to report gross proceeds. Starting with digital assets bought in broker custody on or after January 1, 2026, brokers must also report cost basis, acquisition date, and holding period. Neither change lowers what anyone owes. Both change how, and when, that bill gets calculated, and who’s responsible for getting the number right in the meantime.

Editor’s Update: September 29, 2026. We re-checked this article against the text of IRS Notice 2026-20 on IRS.gov. The notice confirms relief for the period January 1, 2025 through December 31, 2026, applies only to digital assets held in a broker’s custody, requires the identification to be made no later than the date and time of the sale, and leaves broker reporting requirements unchanged. We corrected two details: Notice 2025-7 was issued on December 31, 2024 (not January 2025), and the FIFO versus specific-identification example now uses the right lots and figures. We did not find a newer IRS extension. Separately, the IRS proposed optional rules on March 5, 2026 (IR-2026-29) for delivering Form 1099-DA electronically for statements furnished on or after January 1, 2027; that doesn’t change the cost-basis points here.

What “Cost Basis” Actually Means (and Why the IRS Cares Which Coins You Sell First)

Cost basis is just what you paid for something, plus certain fees, for tax purposes. Sell it for more than that number and you’ve got a capital gain. Sell it for less and you’ve got a loss. Simple enough when you buy one Bitcoin and sell that same Bitcoin a year later.

It gets messier the moment you buy crypto more than once. Say you bought 0.5 BTC in 2021 near $30,000, bought another 0.5 BTC in 2023 near $25,000, and bought a third 0.5 BTC this spring near $70,000. Now you want to sell 0.5 BTC. Which one did you actually sell? The IRS calls each of those separate purchases a “lot,” and which lot you’re deemed to have sold determines your gain or loss — sometimes by tens of thousands of dollars on the exact same transaction.

That’s not a hypothetical for anyone who’s dollar-cost-averaged into Bitcoin or Ethereum over several years. It’s the normal state of affairs for most long-term holders, and it’s exactly the situation these IRS rules are built around.

FIFO vs. Specific Identification: The Method You Pick Changes Your Tax Bill

Without any instructions from you, the default method under the current broker reporting regime is FIFO: first in, first out. Your oldest coins are treated as the ones you sold. In a market that’s spent most of the past few years trending upward, your oldest coins are usually also your cheapest ones — which means FIFO tends to produce the largest taxable gain of any method available to you.

The alternative is specific identification, sometimes shortened to “specific ID.” This lets you tell the IRS (and, in theory, your broker) exactly which lot you’re selling. A common specific-ID strategy is HIFO — highest in, first out — where you sell your most expensive lots first, which minimizes your current-year gain. Another is picking lots that have already crossed the one-year mark, so the gain qualifies for lower long-term capital gains rates instead of short-term rates taxed as ordinary income.

None of this is exotic. Stock investors have used specific ID for decades. What’s new is that crypto brokers are only now building the infrastructure to actually support it, which is the whole reason this relief exists in the first place.

Here’s a concrete version of why the stakes are real. Imagine you’re sitting on that same 1.5 BTC from the example above and Bitcoin is trading near $95,000. Sell 0.5 BTC under FIFO and you’re deemed to have sold your 2021 lot, with roughly $65,000 of taxable gain per coin, or about $32,500 on 0.5 BTC. Sell that same 0.5 BTC under specific ID, picking this spring’s $70,000 lot instead, and your gain drops to roughly $12,500 — not because you did anything different in the market, but because you told the system which pile of coins you meant.

What the IRS Actually Extended: Notice 2026-20

Here’s the part that’s been circulating in crypto tax circles this year, cleaned up. The IRS’s Notice 2026-20 extends temporary relief covering the period from January 1, 2025 through December 31, 2026. During that window, if you hold digital assets in a broker’s custody — a centralized exchange account, for instance — you can satisfy the “adequate identification” requirement using your own books and records, rather than notifying your broker in real time the way the underlying regulations technically demand.

In practice, that means you can document, either transaction by transaction or through a standing order set up in advance, exactly which lot you’re selling. You just don’t have to route that instruction through your broker’s system to make it count, because most brokers’ systems genuinely can’t handle it yet.

Why does that matter? Because without this relief, anyone who couldn’t communicate a specific-ID instruction to their broker would get defaulted into FIFO automatically — not by choice, but because the exchange’s software wasn’t built to ask.

How We Got Here: Rev. Proc. 2024-28 and the First Round of Relief

This didn’t appear out of nowhere. New broker regulations, tied to the IRS’s final digital asset broker reporting rules, required a shift starting January 1, 2025: instead of tracking cost basis in one pooled bucket, brokers had to track it wallet by wallet, account by account. Revenue Procedure 2024-28 gave taxpayers a one-time safe harbor to reasonably allocate their existing basis across those newly separated wallets and accounts before the switch took effect.

That was step one. Step two was the IRS recognizing, in Notice 2025-7 issued on December 31, 2024, that most exchanges simply weren’t ready to accept specific-ID instructions from customers on day one. That notice gave one year of breathing room, through the end of 2025. Notice 2026-20 is the sequel — issued because, according to the IRS’s own reasoning, many custodial brokers still hadn’t finished building that capability, even though they expect to get there sometime during 2026.

Worth flagging plainly: this relief only covers assets sitting in broker custody. It doesn’t apply to information reporting requirements brokers themselves face, and taxpayers relying on Rev. Proc. 2024-28’s basis-allocation safe harbor need to have completed that step first for the relief to apply cleanly.

Form 1099-DA: The New Reporting Form, and Its Two-Stage Rollout

Separately from the cost-basis identification question, there’s Form 1099-DA — the form brokers use to report your digital asset sales to both you and the IRS, functioning much like the familiar 1099-B for stocks. It’s rolling out in two distinct phases.

For sales during 2025, reported on forms you’d have received by February 15, 2026, brokers were only required to report gross proceeds: what you sold, when, and for how much. They were not required to report your cost basis or acquisition date. Those transactions get flagged as “noncovered securities” on the form, which shifts the burden of calculating your actual gain or loss squarely onto you. The IRS also granted brokers good-faith penalty relief under a separate notice for this transition year, recognizing that the reporting infrastructure was brand new.

Starting with assets acquired in a broker’s custody on or after January 1, 2026 — what the form calls “covered securities” — brokers must additionally report cost basis, acquisition date, holding period, and a few other details, with those forms going out to taxpayers by February 15, 2027. That’s a meaningfully bigger compliance lift for exchanges, who now have to track and report the same level of detail crypto investors have always been responsible for tracking themselves.

There’s a wrinkle worth understanding clearly: anything you bought before January 1, 2026 stays “noncovered” forever, even if you sell it years from now. Your broker won’t ever report basis on those older lots. You will still need your own records for anything acquired before that date, no matter how far into the future you eventually sell it.

Why This Is a Genuinely Big Shift for Exchanges

It’s easy to read all this as paperwork for accountants. It isn’t, not entirely. Building systems that can track basis per wallet, accept and honor specific-identification instructions, and generate accurate 1099-DA forms across millions of accounts and blockchain networks is a serious technical undertaking — closer to what traditional brokerages spent years building for stock trading than a quick software patch. That’s precisely why the IRS keeps extending this relief rather than letting it lapse: the infrastructure genuinely isn’t there yet across the industry, and forcing the issue on a fixed deadline would have meant broker mistakes landing on customers’ tax returns.

What You Should Actually Do Differently Heading Into 2026

Start with your own records, not your exchange’s. Even with 1099-DA improving over time, you’re the one who ultimately owns the responsibility for an accurate tax return. Keep a running log of every purchase — date, amount, price, and platform — for every crypto asset you hold, including anything bought before 2026 that will never show basis on a broker form.

Talk to a tax professional about picking a cost-basis method before you need it, not after you’ve already sold something. Specific identification only works if the identification happens at or before the time of sale, whether that’s a per-transaction note in your records or a standing order you set up in advance. Deciding after the fact which lot you “meant” to sell isn’t how this works, and it’s not how the IRS will see it either.

Don’t assume your exchange has this handled just because the deadline moved. Some platforms and third-party crypto tax software already support specific-ID selection at the point of sale. Many still don’t. Check before you trade, not when you’re staring at a 1099-DA next February wondering why it doesn’t match your own spreadsheet.

Common Mistakes and Misconceptions

The single biggest misread of this news is treating “relief” as if it means reduced taxes, or no taxes at all. It doesn’t. Every dollar of gain you’ve realized is still taxable income under existing law. What’s been extended is flexibility in how you identify which coins you sold and a delay in exactly what brokers must report on your behalf — nothing about whether you owe.

A second common mistake is assuming the 1099-DA your broker eventually sends will be complete and final. For 2025 sales it explicitly wasn’t, and for anything acquired before 2026 it never will be, regardless of when you sell it. Filing your return based solely on what a 1099-DA shows, without cross-checking your own records, is a real way to either overpay or underpay.

A third: assuming this only matters for active traders. It matters just as much, arguably more, for buy-and-hold investors sitting on years of accumulated purchases at wildly different prices, since that’s exactly the situation where FIFO versus specific ID produces the biggest gap in taxable gain.

And one more worth naming directly: current wash-sale rules, which prevent stock traders from claiming a loss if they buy back a substantially identical security within 30 days, generally still don’t apply to most cryptocurrency under existing law, since crypto is treated as property rather than a security. That’s a separate question from cost-basis identification, but the two get conflated often enough that it’s worth being explicit here. Rules in this area could change with future legislation, so treat this as the current state of play, not a permanent feature.

Risks and Limitations Worth Understanding

This relief has a hard expiration date on the calendar: December 31, 2026. Nothing guarantees a third extension, and if brokers finish building specific-ID infrastructure sooner than expected, the IRS could reasonably decide not to renew it at all. Plan your recordkeeping habits as if they need to work under the stricter rules eventually, not just for as long as the accommodation happens to last.

It’s also worth being honest that this guidance, like most IRS notices, leaves real gray areas. How aggressively you can apply specific identification, what counts as sufficiently documented, and how state tax authorities treat the same transactions are all questions where a qualified tax professional’s judgment matters more than any single article, including this one.

What to Watch Next

Keep an eye on whether major exchanges announce native specific-ID selection tools during 2026 — that’s the practical signal for whether this relief becomes unnecessary before its own deadline. Watch for any further IRS notices as the December 31, 2026 date approaches, since a fourth notice extending relief again wouldn’t be out of character given how the first two rounds played out. And pay attention to your own broker’s communications about which of your specific holdings will show up as “covered” versus “noncovered” on next year’s 1099-DA, since that distinction determines how much of your own recordkeeping still matters going forward.

This article is for informational and educational purposes only and does not constitute financial, investment, legal, or tax advice. Tax treatment of digital assets depends heavily on your individual circumstances, and cost-basis elections in particular can have lasting consequences on future returns. This is not tax advice — consult a qualified tax professional or CPA familiar with digital assets before choosing a cost-basis method or filing a return involving crypto transactions. Always do your own research (DYOR).

FAQ

Does the IRS relief mean I don’t owe taxes on crypto gains in 2026?

No. The relief only affects which cost-basis identification method you can use and how brokers report your transactions. Every taxable sale, trade, or disposal of crypto still generates a reportable gain or loss under existing law. Nothing about this extension reduces or forgives tax owed.

What is FIFO, and why would the IRS default to it?

FIFO stands for first-in, first-out. Without specific instructions from you, it’s the assumption that the oldest units you hold are the ones you sold. Because crypto prices have generally trended upward over multi-year holding periods, FIFO usually produces your largest possible taxable gain compared to other identification methods.

What’s the difference between Notice 2025-7 and Notice 2026-20?

Notice 2025-7, issued on December 31, 2024, gave one year of relief from being forced into automatic FIFO treatment for broker-held digital assets. Notice 2026-20 extends that same type of relief for the full period from January 1, 2025 through December 31, 2026, because many exchanges still hadn’t built systems to accept specific-identification instructions.

Do I need to tell my exchange which crypto lot I’m selling?

Under the current relief, no — you can document your identification in your own books and records, or through a standing order you set up in advance, without routing it through your broker’s system in real time. That said, once exchanges finish building proper specific-ID tools, using them directly is likely to be simpler and less error-prone than parallel recordkeeping.

What changes with Form 1099-DA in 2026 versus 2025?

For 2025 transactions, brokers reported only gross proceeds, with no cost basis or acquisition date included. Starting with digital assets acquired in broker custody on or after January 1, 2026, brokers must also report cost basis, acquisition date, and holding period on Form 1099-DA, with those forms due to taxpayers by February 15, 2027.

Will my broker ever report cost basis for crypto I bought before 2026?

No. Assets acquired before January 1, 2026 are treated as “noncovered securities” permanently, even if you sell them years later. Your broker won’t report basis on those transactions at any point, which means you remain responsible for your own records on anything purchased before that date for as long as you hold it.

Suggested Internal Links

• Anchor text: “crypto tax basics for US, UK, EU, and Canadian investors” → Cryptocurrency Taxation Basics: What You Need to Know in 2026
• Anchor text: “how the CLARITY Act’s failed Senate vote affects the broader regulatory picture” → CLARITY Act Fails: What It Means for Crypto Investors
• Anchor text: “if you’re still getting oriented on how crypto markets move in cycles” → Crypto Market Cycles Explained: A Beginner’s Guide

Suggested External References

• IRS — Notice 2026-20 (PDF)
• IRS Newsroom — Final regulations and related guidance for broker reporting on digital assets
• Accounting Today — “IRS extends relief for digital asset brokers”
• RSM US — “Temporary relief from specifying digital assets to be sold by broker (IRS Notice 2025-7)”
• The Tax Adviser (AICPA) — “Navigating the Form 1099-DA reporting maze”

Sources

• IRS — Notice 2026-20
• IRS Newsroom — Final digital asset broker reporting guidance
• Accounting Today — IRS extends relief for digital asset brokers
• RSM US — Notice 2025-7 tax alert
• The Tax Adviser — Navigating the Form 1099-DA reporting maze

Key Takeaways

• IRS Notice 2026-20 extends relief from forced FIFO cost-basis treatment on broker-held crypto through December 31, 2026 — it does not reduce anyone’s tax liability.
• Specific identification (including HIFO-style strategies) can meaningfully lower taxable gains compared to FIFO, but the identification must happen at or before the time of sale.
• Form 1099-DA reported only gross proceeds for 2025 crypto sales; starting with assets acquired in 2026, brokers must also report cost basis, acquisition date, and holding period.
• Assets bought before January 1, 2026 remain “noncovered” forever — your broker will never report basis on them, so your own records still matter.
• This is not tax advice. Cost-basis elections have lasting consequences, so work with a qualified tax professional before choosing a method.

If you’re newer to crypto and want the fuller picture on how gains, losses, staking, and mining get taxed in the first place, our crypto taxation basics guide is a good next stop. And if you’re trying to separate this tax-reporting story from the broader regulatory picture, our recent coverage of the CLARITY Act’s failed Senate vote covers where market-structure legislation stands heading into year-end.