Notice 2025-7 provides relief to taxpayers on identifying digital asset units to be sold
On December 31, 2024, the IRS issued Notice 2025-7, in which it announced a measure of relief for individual taxpayers worried about having to “adequately identify” which digital asset unit they are selling to their custodial broker for an account held with that broker. Under the final digital asset broker regulations (discussed here) (Regulations), as of January 1, 2025, taxpayers are required to adequately identify to their custodial broker which digital asset unit they are selling in their account. In the absence of an adequate identification, the units in that account are deemed sold on a first in, first out (FIFO) basis. However, the Regulations also provide that brokers are not required to receive or track this identifying information until January 1, 2026. This disconnect could cause problems for a taxpayer trying to make an adequate identification during 2025, but whose broker is not yet prepared (or required) to receive that information.
The Notice provides relief on this issue by permitting a taxpayer, solely for the 2025 tax year, to make the adequate identification to themselves rather than to their broker. It provides that a taxpayer needs to track and keep a record of the adequate identification at or before the time of a sale, and has two options:
- Make an identification and keep a record of it for each individual sale throughout the year
- Establish a standing instruction that applies to a custodial account for every sale during the year. The method needs to be applied consistently for the entire year, but may follow first in, first out; last in, last out; highest in, highest out; etc.
The Notice however confirms that, as of January 1, 2025, taxpayers will still need to keep track all of their digital asset holdings separately by each individual wallet or account, pursuant to one of the safe harbor methods provided in Rev. Proc. 2024-28. Notice 2025-7 indicates that the relief it provides is only available to taxpayers who comply with Rev. Proc. 2024-28.