The U.S. Internal Revenue Service (IRS) has announced that starting January 1, 2026, all cryptocurrency brokers must report digital asset transactions using the First-In, First-Out (FIFO) method. This change significantly impacts how crypto investors calculate taxable gains and losses.
What is FIFO in Crypto Taxes?
FIFO is an accounting method that assumes the first assets you buy are the first ones you sell.
For example, if you purchased Bitcoin in 2021 and 2022, FIFO treats the 2021 Bitcoin as sold first. In a rising market, this method can lead to higher taxable gains, as older assets with lower purchase prices are considered sold before newer ones.
Key Changes for 2026
1. Mandatory FIFO Reporting
If investors don’t specify an alternative accounting method, brokers will automatically calculate the cost basis using FIFO. This ensures consistent reporting across all transactions and aligns with IRS requirements.
2. Wallet-by-Wallet Basis
FIFO must be applied separately to each wallet. Transactions in different wallets, even for the same cryptocurrency, are treated independently. Accurate wallet-level record-keeping will be essential.
3. Introduction of Form 1099-DA
Starting in 2026, brokers will issue Form 1099-DA. This form reports the cost basis and gross proceeds of all crypto transactions to both the IRS and the taxpayer. Maintaining detailed transaction records will make reporting easier and reduce errors.
Safe Harbor Provision
To ease the transition, the IRS has introduced a Safe Harbor provision.
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Taxpayers can choose a consistent cost basis method for all transactions by December 31, 2024.
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This helps avoid penalties for previous years’ discrepancies.
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It’s particularly useful for investors who previously used methods like Highest-In, First-Out (HIFO) or Specific Identification.
Implications for Crypto Investors
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Higher Tax Liabilities: FIFO may increase capital gains taxes because older, lower-cost assets are sold first.
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Need for Detailed Records: Keep precise records of purchase dates, amounts, and wallet identifiers.
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Early Preparation: Understand Form 1099-DA and align accounting methods before 2026 to avoid surprises.
Final Thoughts
The mandatory FIFO method represents a major shift in U.S. crypto tax reporting. While it may increase tax liabilities, the Safe Harbor provision provides an opportunity to streamline reporting.
Crypto investors should consult tax professionals early to navigate these changes effectively and stay compliant.