Temporary relief for adequate identification of digital assets

As some digital asset brokers may not have had the technology in place to accept specific instructions or standing orders by Jan. 1, 2025, Notice 2025-7 provides temporary relief allowing taxpayers to use additional methods “for making an adequate identification” within the meaning of Regs. Sec. 1.1012-1(j)(3)(ii) between Jan. 1, 2025, and Dec. 31, 2025.

Background: Sec. 1012(c)(1) states that in the case of the sale, exchange, or other disposition of a specified security, “the conventions prescribed by regulations under [Sec. 1012(c)(1)] must be applied on an account-by-account basis.” As of Jan. 1, 2023, the definition of a “specified security” under Sec. 6045(g)(3) includes digital assets. Sec. 6045(g)(3)(D) further defines digital assets as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” Regs. Sec. 1.1012-1(j) 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. There are, however, separate rules depending on whether the units are held by the taxpayer in the custody of a broker (Regs. Sec. 1.1012-1(j)).

In the case of digital assets held in the custody of a broker, taxpayers are permitted to make an adequate identification of the units to be sold, disposed of, or transferred in two ways: First, the taxpayer may specify to the custodial broker no later than the date and time of the sale, disposition, or transfer the “particular units” of the digital asset to be sold, disposed of, or transferred (Regs. Sec. 1.1012-1(j)(3)(ii)). This would be accomplished by reference to any identifier that the broker designates as sufficiently specific to allow it to determine the basis and holding period of those units (id.).

Second, taxpayers may make an adequate identification by using a standing order or instruction communicated to their custodial broker (id.). Additionally, if the custodial broker offers taxpayers only one method of making a specific identification, Regs. Sec. 1.1012-1(j)(3)(ii) treats the method as a standing order or instruction. If the taxpayer does not make an adequate identification, Regs. Sec. 1.1012-1(j)(3)(i) treats units as sold, disposed of, or transferred on a FIFO basis. The separate-ordering rules in Regs. Secs. 1.1012-1(j)(1) and (2) for units not held in the custody of a broker are not affected by the temporary relief provided in Notice 2025-7.

Discussion: Regs. Sec. 1.1012-1(j) applies to all acquisitions and dispositions of digital assets on or after Jan. 1, 2025 (Regs. Sec. 1.1012-1(j)(6)). Given that digital asset brokers may not have had the technology in place necessary to accept specific instructions or standing orders by Jan. 1, 2025, taxpayers may not have been able to make adequate identifications in conformity with Regs. Sec. 1.1012-1(j)(3)(ii). As a result, units in the custody of brokers that are sold, disposed of, or transferred would be determined under the FIFO rule. Notice 2025-7 provides temporary relief allowing taxpayers to use additional methods for making an adequate identification within the meaning of Regs. Sec. 1.1012-1(j)(3)(ii).

Conclusion: During the relief period, Jan. 1, 2025, to Dec. 31, 2025, taxpayers may make an adequate identification of a digital asset to be sold, disposed of, or transferred from the units held in the custody of a broker in two ways:

First, the taxpayer may identify, “no later than the date and time of the sale, disposition, or transfer, on the taxpayer’s books and records, the particular units to be sold, disposed of, or transferred by reference to any identifier, such as purchase date and time or the purchase price for the unit, that is sufficient to identify the basis and holding period of the units sold, disposed of, or transferred.”

Second, the taxpayer may record “a standing order on the taxpayer’s books and records, provided that the recorded standing order includes sufficient information to identify any digital asset units sold, disposed of, or transferred and is entered into the taxpayer’s books and records before the units covered by the order are sold, disposed of, or transferred.”

Taxpayers that make an adequate identification in accordance with Notice 2025-7 are not bound by the rule in Regs. 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, as that rule does not apply during the relief period. Additionally, taxpayers relying on the safe-harbor provision under Rev. Proc. 2024-28, which permits taxpayers to make either a specific unit allocation or a global allocation in order to allocate units of unattached basis, subject to various conditions, may rely on the temporary relief in Notice 2025-7 after the applicable requirements of Rev. Proc. 2024-28 have been satisfied.

■ Notice 2025-7

— Matthew Geiszler, Ph.D., is a lecturer in accounting in the Brooks School of Public Policy, and John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, both at Cornell University. To comment on this column, contact Paul Bonner, the JofA‘s tax editor.