Alternative methods allowed for identification of digital assets

The IRS provided temporary relief that allows eligible taxpayers to use alternative methods to make adequate identification of digital asset units that are sold, disposed of, or transferred during the 2025 relief period, which began Wednesday and ends Dec. 31.

The notice applies to adequate identification, within the meaning of Regs. Sec. 1.1012-1(j)(3)(ii), of digital assets held in the custody of brokers, the IRS said in Notice 2025-7, issued Tuesday.

Under Regs. Sec. 1.1012-1(j)(3)(ii), for digital asset units held in the custody of a broker, a taxpayer is permitted to make an adequate identification of units to be sold, disposed of, or transferred by:

• Specifying to the custodial broker, no later than the date and time of the sale, disposition, or transfer, the particular units of the digital asset to be sold, disposed of, or transferred by reference to any identifier that the broker designates as sufficiently specific to allow it to determine the basis and holding period of those units.

• Using a standing order or instruction communicated to the custodial broker.

However, according to the IRS, some digital asset brokers “may not have in place, by Jan. 1, 2025, the technology needed to accept taxpayers’ specific instructions or standing orders,” leaving some taxpayers unable to make adequate identification in conformity with Regs. Sec. 1.1012-1(j)(3)(ii). In these situations, by default, any units in the custody of such brokers that are sold, disposed of, or transferred would be determined under the FIFO (first-in, first-out) rule, the notice said.

To provide temporary relief, the notice allows a taxpayer to make an adequate identification during the relief period of a taxpayer’s units of a digital asset to be sold, disposed of, or transferred from the taxpayer’s units held in the custody of a broker by two alternative methods:

• Identifying, no later than the date and time of the sale, disposition, or transfer, on the taxpayer’s books and records, the units to be sold, disposed of, or transferred by reference to any identifier, such as purchase date and time or the purchase price for the unit, that is sufficient to identify the basis and holding period of the units.

• Recording a standing order on the taxpayer’s books and records, provided that the recorded standing order includes sufficient information to identify any digital asset units sold, disposed of, or transferred and is entered into the taxpayer’s books and records before the units are sold, disposed of, or transferred.

Under the notice, if a taxpayer makes an adequate identification, the rule that treats taxpayers whose broker offers only one method of making a specific identification as having made a standing order or instruction, does not apply. In addition, taxpayers who rely on the safe harbor under Rev. Proc. 2024-28 may rely on the temporary relief described in the notice only after the applicable requirements of Rev. Proc. 2024-28 have been satisfied.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.