IRS Allows Alternative Methods for Identification of Digital Assets
The IRS recently issued Notice 2025-7, which provides temporary relief to allow 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. 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 a broker.
Under these regulations, 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.
The notice permits a taxpayer to make an adequate identification of a digital asset to be sold, disposed of or transferred from the taxpayer’s units held in the custody of a broker during the relief period 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.
The IRS noted that some digital asset brokers “may not have in place, by Jan. 1, 2025, the technology needed to accept taxpayers’ specific instructions or standing orders.” The notice stated that in these cases, 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.
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. Additionally, 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.