IRS Extends Temporary Relief for Identifying Digital Asset Units Through 2026

(Parker Tax Publishing April 2026)

The IRS issued a notice extending the temporary relief provided in Notice 2025-7 for an additional year. Specifically, the notice allows eligible taxpayers to use certain alternative methods for making an adequate identification under Reg. Sec. 1.1012-1(j)(3) with respect to units of a digital asset held in the custody of a broker that are sold, disposed of, or transferred during the period beginning on January 1, 2025, and ending on December 31, 2026. Notice 2026-20.

Background

Code Sec. 1012(c)(1) provides that, in the case of the sale, exchange, or other disposition of a specified security on or after the applicable date, the conventions prescribed by regulations under Code Sec. 1012 must be applied on an account-by-account basis. Code Sec. 1012(c)(3) provides that, for purposes of Code Sec. 1012, the terms "specified security" and "applicable date" have the same definitions given to those terms in Code Sec. 6045(g)(3). Section 80603 of the Infrastructure Investment and Jobs Act (Pub. L. 117-58) expanded the definition of a specified security in Code Sec. 6045(g)(3) to include digital assets. Section 80603 had an applicable date of January 1, 2023. Code Sec. 6045(g)(3)(D) generally defines a digital asset, for purposes of information reporting by brokers, as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Treasury Secretary.

In 2024, the IRS published final regulations in T.D. 10000. Reg. Sec. 1.1012-1(j) of the final regulations provides ordering 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. The regulation 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, Reg. Sec. 1.1012-1(j)(3)(ii) generally permits 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. The taxpayer may 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. Reg. Sec. 1.1012-1(j)(3)(ii) also permits taxpayers to make an adequate identification of such units by using a standing order or instruction communicated to their custodial broker. Further, 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 -- Reg. Sec. 1.1012-1(j)(3)(ii) treats such 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 in accordance with Reg. Sec. 1.1012-1(j)(3)(ii), Reg. Sec. 1.1012-1(j)(3)(i) treats 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 (FIFO rule). Regardless of whether the taxpayer makes an adequate identification, in the case of digital assets exchanged for different digital assets, Reg Sec. 1.1012-1(j)(3)(iii) deems any units withheld, either for the broker's backup withholding obligations under Code Sec. 3406, or for payment of services described in Reg. Sec. 1.1001-7(b)(1)(ii) (digital asset transaction costs), as coming from the units received in the exchange. Separate ordering rules, found in Reg. Sec. 1.1012-1(j)(1) and (2), prescribe how units not held in the custody of a broker are identified as the units sold, disposed of, or transferred. Reg. Sec. 1.1012-1(j)(6) provides that Reg. Sec. 1.1012-1(j) applies to all acquisitions and dispositions of digital assets on or after January 1, 2025.

Contemporaneously with the issuance of Reg. Sec. 1.1012-1(j), the IRS issued Rev. Proc. 2024-28, which provides guidance to taxpayers regarding how to transition from a universal or multi-wallet basis allocation methodology to a wallet-by-wallet or account-by-account basis allocation methodology. Specifically, subject to certain requirements, Rev. Proc. 2024-28 provides a safe harbor for taxpayers to allocate their units of unattached basis in digital assets acquired before January 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 permits 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 January 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 Reg. Sec. 1.1012-1(j)(3)(ii). 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 in Reg. Sec. 1.1012-1(j)(3)(ii) to communicate identifications to the broker. Notice 2025-7 also provides that if a taxpayer makes an adequate identification under the notice, the rule in Reg. Sec. 1.1012-1(j)(3)(ii), 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.

Digital asset custodial brokers informed the Treasury Department 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 Department and the IRS 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. Notwithstanding the temporary relief provided in Notice 2025-7, some of those custodial brokers do not 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. Consequently, some taxpayers may be temporarily unable to make adequate identifications in conformity with Reg. Sec. 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, Notice 2026-20 extends the relief period specified in Notice 2025-7 through December 31, 2026.

Notice 2026-20

Notice 2026-20 extends the temporary relief provided by Notice 2025-7, allowing taxpayers to use additional methods for making an adequate identification within the meaning of Reg. Sec. 1.1012-1(j)(3)(ii), during the period beginning on January 1, 2025, and ending on December 31, 2026.

Notice 2026-20 does not prohibit taxpayers from complying with the requirements of Reg. Sec. 1.1012-1(j)(3)(ii). In addition, the notice does not affect how the safe harbor described in Rev. Proc. 2024-28 applies and does not affect the requirement for brokers to report gross proceeds on the Form 1099-DA, Digital Asset Proceeds From Broker Transactions, beginning in 2025. Taxpayers relying on the safe harbor described in Rev. Proc. 2024-28 may also rely on the temporary relief described in Notice 2026-20 once the applicable requirements of Rev. Proc. 2024-28 have been satisfied, including, in the case of taxpayers making a global allocation, the completion of the global allocation. A method of specifically identifying the units of a digital asset sold, disposed of, or transferred (for example, by the earliest acquired, the latest acquired, or the highest basis) is not a method of accounting to which Code Secs. 446 or 481 apply.

As with the temporary relief provided in Notice 2025-7, the temporary relief described in Notice 2026-20 does not apply for purposes of the Reg. Sec. 1.6045-1 information reporting rules for digital assets. Consequently, 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. Similarly, as with the temporary relief provided in Notice 2025-7, the relief provided under Notice 2026-20 does not apply to digital asset units not held in the custody of a broker.

For a discussion of sales, exchanges, or other dispositions of digital assets, see Parker Tax ¶119,610.

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