IRS Extends Deadline for Crypto Investors to Choose Sold Coins

The Internal Revenue Service (IRS) has quietly extended the deadline for crypto investors to choose which coins they legally sold, affecting their tax bills. This extension, outlined in Notice 2026-20, gives investors until December 31, 2026, to decide which coins to report as sold. The rule, based on Treasury Regulation §1.1012-1(j), determines the tax implications of a sale, with the difference between correct and incorrect reporting potentially swinging tax bills by thousands of dollars. The regulation defaults to first-in, first-out (FIFO) if specific units are not identified, resulting in the oldest and usually cheapest coins being counted as sold first.

A composite investor, a 66-year-old married retiree holding Bitcoin, demonstrates the potential impact of this rule. Selling 0.2 BTC at $83,703.75, which brings in $16,740.75, the investor can report either a $16,619 gain or a $6,073 loss, depending on which coins are chosen. Using specific identification, the investor can choose the 2025 lot, resulting in a $6,072.79 short-term loss that can be used against ordinary income, saving $660 and carrying forward $3,072.79. The math works because of the current market, with Bitcoin down 26.73% over the past year and Ethereum down 35.54%.

The IRS regulation covers digital asset sales beginning January 1, 2025, and requires tracking basis per wallet and account, not combined across the entire portfolio. There are two tracks: coins held at a broker, which require identification no later than the date and time of the sale, and coins in the investor's own wallet, which require identification in their own books and records by the time of the sale. 'Highest in, first out' (HIFO) is simply specific identification aimed at the most expensive units, requiring only naming the units on time and documenting it.