Quietly, the IRS Gave Crypto Investors Until December 31, 2026 to Rewrite Their Tax Basis. Most Have No Idea.
The IRS quietly extended a window that lets crypto investors choose which coins they legally sold, and the difference between picking wrong and picking right can swing your tax bill by thousands of dollars this year.
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Sell the same 0.2 Bitcoin (CRYPTO:BTC) on the same day at the same price, and you can report either a $16,619 gain or a $6,073 loss. What determines it is which coins you tell the IRS you sold.
The rule behind this is the digital-asset specific identification provision in Treasury Regulation §1.1012-1(j). It falls under Internal Revenue Code Section 1012, the law that sets your basis at what you paid. If you don’t pick specific units, the regulation defaults to first in, first out (FIFO), so your oldest and usually cheapest coins count as sold first. A new IRS release, Notice 2026-20, gives you more time to make that choice: its relief runs through December 31, 2026.
One Crypto Sale, Two Very Different Tax Bills
Consider a composite investor: a 66-year-old married retiree holding bitcoin in one exchange account. She bought 0.2 BTC on October 2, 2016, at $610.93 and another 0.2 BTC on September 30, 2025, at $114,067.71. Today she sells 0.2 BTC at $83,703.75, which brings in $16,740.75.
Assume a 2026 joint return in the 22% bracket, where long-term gains are taxed at 15%, and no other capital gains this year.
| Method | Basis | Result | Federal Tax Effect |
|---|---|---|---|
| FIFO (2016 lot) | $122.19 | $16,618.56 long-term gain | $2,492.78 owed |
| Specific ID (2025 lot) | $22,813.54 | $6,072.79 short-term loss | $3,000 deducted against ordinary income, saving $660. $3,072.79 carries forward |
That’s a federal difference of about $3,153 this year, plus a loss she can use later. In most states the gap gets wider. Residents of states with no income tax see only the federal piece.
The math works because of where the market falls now. Bitcoin is down 26.73% over the past year, and Ethereum (CRYPTO:ETH) is down 35.54%. Anyone who bought during that stretch probably holds losing lots alongside older lots with large gains.
How Section 1012’s Crypto Rule Picks Your Coins
The regulation covers digital asset sales beginning January 1, 2025. Since Revenue Procedure 2024-28, basis is tracked per wallet and account, not combined across your whole portfolio. There are two tracks:
- Coins held at a broker: Identify the specific units no later than the date and time of the sale. A standing order, such as “highest cost first,” counts. If you give no instruction, FIFO applies within that account.
- Coins in your own wallet: Identify the units in your own books and records by the time of the sale. If you don’t, FIFO applies within that wallet.
“Highest in, first out” (HIFO) is simply specific identification aimed at your most expensive units. Using it requires only naming the units on time and documenting it. The timing is strict: the identification “must be made no later than the sale, disposition, or transfer” or set in a standing instruction recorded in advance. After a sale closes, you can’t go back and pick different units.
Notice 2026-20 Gives Broker Accounts One More Year
Brokers began reporting gross proceeds for 2025 transactions on Form 1099-DA, and cost basis for covered assets from 2026. Many platforms still can’t take lot-level instructions.
The IRS published Notice 2026-20 on April 6, 2026. It extends relief first granted under Notice 2025-7, so through the end of 2026 you can keep a standing identification in your own records even for coins held at a broker. Once the relief ends, you’ll need to give that instruction to the broker.
Expect your 1099-DA to show FIFO results that differ from your return. Form 8949 is where you match up the two, and your transaction records back up the numbers you choose.
Three Crypto Tax Moves Before December 31
- Write down a standing order now. Record a dated rule, such as highest cost first, in your own records. Also file it with any exchange that takes one.
- Claim losses from recent lots. Crypto is currently outside the wash-sale rule, so you can buy back right away. A bill in Congress could change that in a future year.
- Keep the evidence. Save purchase dates, prices, and wallet addresses for every lot. The IRS compares what brokers report with what’s on your return.
Your low-basis coins are still worth something even if you don’t sell them. If they’re held until death, heirs get a step-up in basis, and the built-in gain disappears. How to weigh that against harvesting losses today is worth working through with a CPA before year-end.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
