On December 31, 2024, the IRS issued Notice 2025-7, which provides alternative methods for adequately identifying digital assets held by a broker when digital assets are sold or exchanged for purposes of determining the basis and holding period of these digital assets.
For these purposes, a “broker” is defined in part as any person that, in the ordinary course of a trade or business, stands ready to effect sales to be made by others.[1] A “digital asset” means any digital representation of value that is recorded on a cryptographically secured distributed ledger or any similar technology without regard to whether each individual transaction involving that digital asset is actually recorded on that ledger and that is not cash.[2]
Pursuant to treasury regulations finalized on July 9, 2024, when multiple units of the same digital asset are held in the custody of a broker, adequate identification occurs if, no later than the date and time of the sale, disposition, or transfer, the taxpayer:
- specifies to the broker the particular units of the digital asset to be sold, disposed of, or transferred by reference to any identifier, such as purchase date and time or purchase price, that the broker designates as sufficiently specific to identify the units sold, disposed of, or transferred; or
- has a standing order or instruction for the specific identification of digital assets, which is treated as an adequate identification made at the time of sale, disposition, or transfer.
If a broker only allows one method of making a specific identification—for example, by the earliest date on which units of the same digital asset were acquired, the latest date on which units of the same digital asset were acquired, or the highest basis—this method is treated as a standing order or instruction.[3]
In the absence of adequate identification, units of digital assets are treated as sold, disposed of, or transferred in order of time from the earliest date on which units of that same digital asset held by the broker were acquired by the taxpayer (in other words, first in first out).[4]
These final regulations apply to all asset acquisitions and dispositions of digital assets on or after January 1, 2025.[5]
Concerned that brokers may not have been able may not have in place the technology needed to accept specific instructions or standing orders from taxpayers, the IRS has agreed to provide taxpayers with temporary relief for the period beginning January 1, 2025, through December 31, 2025.[6] According to Notice 2025-7, taxpayers whose digital assets are held in the custody of a broker may make an adequate identification through the following means:
- Identifying, 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; or
- Recording a standing order on the taxpayer’s books and records if 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.[7]
If a taxpayer makes an adequate identification under Notice 2025-7, the rule that treats taxpayers whose broker offers only one method of making a specific identification as having made a standing order or instruction does not apply during the relief period.[8]
[1] Treas. Reg. §§ 1.1012-1(j)(1), 1.6045-1(a)(1).
[2] Treas. Reg. §§ 1.1012-1(j)(1), 1.6045-1(a)(19)(i).
[3] Treas. Reg. § 1.1012-1(j)(3)(ii).
[4] Treas. Reg. § 1.1012-1(g)(3)(i).
[5] Treas. Reg. § 1.1012-1(j)(6).
[6] Notice 2025-7, §§ 2, 3.03, 4.01.
[7] Notice 2025-7, § 4.02 (emphasis added).
[8] Notice 2025-7, § 4.03.
