As part of CoinDesk's Tax Week 2023, Kirk Phillips, who is the founder of educational site cryptobullseye.zone, joins "First Mover" to discuss the new asset broker regulation proposal from the U.S. Internal Revenue Service (IRS).
These new proposed regulations are saying that you can use both FIFO or you can use specific identification for your cost basis, right? But however, what you have to do now is there's two things you have to do to qualify for specific specific identification number. One is you have to uh notify your broker, which would be in this case, your centralized exchange, what specific lot or tranche of Bitcoin or E or whatever it is that you want to sell. So uh so you have to do that ahead of time. And in addition, you also have to identify in your own personal records, the particular lot or the tranche of your crypto that you wanna sell. So the issue with the broker is that there's really no mechanism right now to notify a broker. It's just that the exchange is not these exchanges don't, don't have these type of mechanisms in place. So now you could uh theoretically you could send a email to support at Coinbase or whatever that is. However, the it doesn't mean the exchange is actually gonna take that information and use it to prepare uh your, your 1099 D A which is the report that's supposedly gonna be issued by the IRS with all your trades. And so, uh it, they, they, the exchange is not gonna bake that into the reporting. So that's, that's the issue there, which means that they can't, if the model doesn't support specific identification, that means that these 1099 das are essentially gonna all be issued on a fi fo basis, like I said, meanwhile, it's, you know, because basically preparing crypto taxes is, is impossible to do without crypto tax software. And the software is limited in the sense that uh generally speaking was not designed to have an interface that allows you to identify a specific lot that you want to sell ahead of time, that you can't therefore calculate your taxes based on true specific identification based on how the IRS wants you to do it.