IRS Extends Digital Asset Identification Relief for Broker-Held Crypto
The IRS has extended temporary relief that lets taxpayers use their own books and records to identify which units of broker-held digital assets they sold, pushing the deadline from January 1, 2026, to December 31, 2026. The extension, issued in Notice 2026-20, continues the relief first granted under Notice 2025-7 and applies to all U.S. taxpayers who buy, sell, or exchange crypto through a custodial broker. See the IRS digital asset FAQs and the IRS digital assets hub for background.
The IRS acted because most custodial brokers are still not technologically ready to accept specific-identification instructions from customers, even as Form 1099-DA reporting for gross proceeds went into effect for 2025 transactions.
Who this affects:
- Active crypto traders using HIFO, LIFO, or specific-lot methods to manage capital gains
- Long-term holders tracking cost basis across multiple exchanges
- Americans abroad holding digital assets on foreign or U.S.-based custodial exchanges
- Any taxpayer whose 1099-DA is likely to disagree with their own cost-basis records
Here are the facts, what the relief does, and what to do before the extended deadline runs out.
What Notice 2026-20 actually says
Notice 2026-20 extends the transition rule in Treas. Reg. §1.1012-1(j)(3)(ii), the regulation governing how taxpayers must make an “adequate identification” of digital asset units when they sell or exchange them. Under the permanent rule, a taxpayer must provide specific-identification instructions to their broker at or before the time of sale. Without that, the default is first-in, first-out (FIFO).
Notice 2025-7 paused that requirement for calendar year 2025. Notice 2026-20 extends the pause through the end of 2026.
| Key detail | Before the relief | Under Notice 2026-20 |
|---|---|---|
| How to identify sold units | Specific instruction sent to broker | Own books and records are acceptable |
| Default if no identification | FIFO | FIFO |
| Scope | Broker-custodied digital assets | Broker-custodied digital assets only |
| Self-custody wallets | Always books and records | Not covered by this relief (already books and records) |
| Relief period end | N/A | December 31, 2026 |
| Form 1099-DA impact | Reported basis may differ | Reported basis may still differ |
Source: IRS Notice 2026-20; IRS Notice 2025-7; Treasury Regulation §1.1012-1(j)(3)(ii).
Why the IRS extended the relief
The extension is a broker-readiness issue, not a policy shift. The IRS acknowledged that while many custodial brokers built systems to report gross proceeds on Form 1099-DA for 2025, most have not yet deployed the infrastructure to accept and process specific-identification instructions from customers at the time of sale.
Without the relief, taxpayers who wanted to sell a specific tax lot, for example, a lot with a higher cost basis to minimize gain, would have been forced to default to FIFO. That would have produced materially different tax outcomes for active traders and long-term holders sitting on large unrealized gains from earlier purchase lots.
By extending the relief, the IRS preserves methods like HIFO (highest-in, first-out) and specific-lot identification for one more tax year.
What this means for U.S. crypto holders at home
For domestic taxpayers, the practical impact is straightforward.
- HIFO and specific-lot methods remain viable for 2026: You can continue tracking cost basis and identifying which lots you sold through your own software or spreadsheets, even if your broker cannot accept instructions.
- Form 1099-DA will arrive in January 2027 for 2026 transactions: It will report gross proceeds and, in some cases, basis. Your records may not match it.
- Reconciliation is the taxpayer’s job: If your records show a specific-lot sale and the 1099-DA reports FIFO, you must reconcile the difference on your return and keep documentation in case of IRS inquiry.
- Recordkeeping is non-negotiable: Contemporaneous records, trade timestamps, wallet addresses, exchange confirmations, and cost-basis calculations must be maintained for each transaction.
The relief does not change what you owe. It changes which lot you are treated as having sold, which directly affects your capital gain or loss.
What this means for Americans abroad
Expats with digital asset holdings face the same federal rules plus several extra layers.
- U.S.-source reporting still applies: U.S. citizens and green card holders report worldwide crypto gains on their U.S. return regardless of residence.
- Foreign exchanges are outside the 1099-DA system: If you hold crypto on a non-U.S. custodial exchange, you will not receive a 1099-DA at all, and books-and-records tracking is the only option. Notice 2026-20’s relief is aimed at U.S. broker-custodied accounts, so expats relying on foreign exchanges should focus on clean internal records and may need to consider FBAR (FinCEN Form 114) and Form 8938 reporting where accounts meet thresholds. Not sure which applies? See our FBAR vs. Form 8938 comparison.
- Foreign capital gains rules interact: Capital gains on digital assets are generally sourced to the taxpayer’s country of residence for treaty purposes, which can create timing and credit mismatches. Our guide on foreign capital gains covers the basics.
- Self-custody wallets are not covered by this relief: If you hold crypto in a hardware or software wallet, you were already required to maintain identification records on your own. Nothing changes for you.
For a broader look at how the IRS treats crypto for Americans living abroad, see our guide to expat taxes on cryptocurrency.
What you should do now
The relief buys time, not permanence. The permanent specific-identification rule returns on January 1, 2027. Practical steps:
- Pick a consistent method. FIFO, HIFO, LIFO, or specific-lot. Stick with one method per account and document it.
- Keep contemporaneous records. Date, time, asset, quantity, cost basis, and disposal price for every transaction.
- Download 1099-DA as soon as brokers issue them. Reconcile against your own records and flag discrepancies.
- Check standing-order options. Some brokers can honor a standing instruction like HIFO even without per-trade specific ID. Enable it if available.
- If you are years behind on crypto reporting, consider whether the Streamlined Filing Compliance Procedures are an option to catch up without penalties.
Ready to file with confidence?
This article is for informational purposes only and does not constitute tax advice. Tax situations vary, and you should consult a qualified tax professional about your specific circumstances.
