There’s been a lot of discussion lately around IRS Notice 2026-20, and I’m seeing one particular takeaway repeated quite a bit:
“You can just run your crypto tax software at year-end, apply Spec ID (or HIFO/LIFO), and you’re good.”
I understand why people interpret it that way. On the surface, it sounds like the IRS gave taxpayers more flexibility.
But that’s not quite what the Notice says.
What Notice 2026-20 Actually Changed
The Notice provides temporary relief that allows taxpayers to rely on their own books and records for identifying which units of crypto are being sold.
In plain English, that means:
For 2025 and 2026, you don’t have to tell the exchange which tax lot you’re selling at the time of your crypto trade.
That’s a meaningful and practical change, especially since most exchanges don’t support lot-level instructions anyway.
What the Notice Did NOT Change
What didn’t change is just as important.
The IRS did not eliminate the requirement that:
You must identify which units you’re selling at or around the time of the transaction.
This requirement comes from long-standing tax rules (Treas. Reg. §1.1012-1(c)) and IRS Notice 2026-20 does not override it.
Where the Disconnect Happens
In practice, here’s what most crypto investors (and many tax professionals) are doing:
- Trades happen throughout the year
- Transaction data is uploaded into a crypto tax software later
- The software applies HIFO, LIFO, or “Spec ID” when generating the tax report
The issue is timing.
The process is happening after the trades have already occurred.
So, the real question isn’t just:
“Which method did you use?”
It’s:
“When did you decide which units were sold?”
Is That Still Considered Specific Identification?
Technically, no.
True specific identification requires:
- Identifying the exact units being sold
- At or before the time of the trade
- With records to support that timing
If the lot selection is happening at year-end (or during tax prep), that is:
A post hoc allocation method, not true Spec ID
Even if the software labels it as such.
So Where Does That Leave Taxpayers?
This is where things become more nuanced.
The IRS is aware that:
- Crypto tax tools are still evolving
- Exchanges don’t support lot identification
- 2025 is effectively a transition year
So, if you are:
- Using a consistent method
- Applying it reasonably
- Not retroactively optimizing for the lowest tax outcome
You are likely in a defensible position for now.
But Don’t Treat This as a Free Pass
Notice 2026-20 should not be interpreted as permission to:
Let software determine tax lots after the fact with no documentation or methodology behind it.
Because the direction of IRS guidance is clear:
- More structure
- More documentation
- More alignment with broker reporting
- Less flexibility over time
A Practical Takeaway
If your crypto tax software is selecting tax lots after the trade has already occurred, you are probably not using true specific identification, even if it appears that way in the report.
That doesn’t automatically mean you’ve done something wrong.
But it does mean you should:
- Understand how your method works
- Be consistent in applying it
- Be prepared to explain and support it if needed
If this sounds too complicated to you, you can always use FIFO (“First In First Out”), the default method specified by the IRS.
Final Thought
This is one of those areas where the rules have moved faster than the tools.
And while the IRS is giving taxpayers some flexibility during this transition period, that flexibility has limits.
The sooner you understand how your cost basis is actually being determined, the better positioned you’ll be – not just for 2025, but for the years ahead.
