What is IRS Notice 2026-20?
IRS Notice 2026-20 extends crypto lot-ID relief through 2026. Here’s what it means — and the potential complications for crypto investors.
What was IRS Notice 2025-7?
Before getting into Notice 2026-20, it helps to understand the relief that started it all.
In January 2025, the IRS released Notice 2025-7 to address a practical problem with the new crypto broker reporting rules.
Starting in 2025, exchanges and brokers must begin reporting digital asset transactions to taxpayers and the IRS using Form 1099-DA. These reports include cost basis and gain/loss calculations.
However, many exchanges were not ready to support specific lot identification—the ability for users to select exactly which coins or tokens were sold.
Without this capability, most exchanges default to FIFO (First-In-First-Out).
Notice 2025-7 introduced temporary relief for the 2025 tax year. It allowed taxpayers to:
Identify which crypto lots were sold using their own records
Use any cost basis method that qualifies for specific identification (FIFO, LIFO, HIFO, etc.)
Report their calculations even if they differ from the exchange’s records
In other words, taxpayers could rely on their own lot tracking, even if the exchange reported something different.
This relief was originally set to apply only through 2025.
What is IRS Notice 2026-20?
In early 2026, the IRS issued Notice 2026-20, which extended this temporary relief and pushed the deadline for the lot identification relief from December 31, 2025, to December 31, 2026.
As such, the IRS is allowing taxpayers to continue relying on their own records through the end of the 2026 tax year.
Extension of the lot identification relief
The most important part of the notice is the extension of the relief under Treasury Regulation §1.1012-1(j)(3)(ii).
This means that through December 31, 2026, taxpayers can:
Identify which digital asset units were sold using their own books and records
Use specific identification methods such as FIFO, LIFO, or HIFO
Report their own calculations even if they differ from the broker’s reporting
In practical terms, if an exchange reports a transaction using FIFO but your records identify a different lot as sold, your records can still determine the correct cost basis during this relief period.
Broker reporting still applies
While taxpayers can rely on their own records, brokers must still report transactions using their internal systems, and currently, the majority default to FIFO.
This means taxpayers may receive Form 1099-DA reports that do not match their own calculations. The IRS acknowledges this mismatch in the notice and allows taxpayers to report the correct figures using their own records.
What’s the problem with IRS Notice 2026-20?
While the notice provides practical relief for taxpayers, some tax professionals believe it may create longer-term complications.
One issue that experts have highlighted is the potential for divergence between taxpayer records and exchange records.
Because the notice allows taxpayers to use their own lot identification methods, even when exchanges report transactions differently, it’s possible for the two sets of records to quickly drift apart.
Example
You buy BTC several times throughout the year.
January: 1 BTC @ $60,000
March: 1 BTC @ $50,000
August: 1 BTC @ $70,000
In December, you sell 1 BTC.
If the exchange reports using FIFO, then the oldest purchase in January was sold first.
But if you report using LIFO, then the newest purchase in August was sold first.
Both approaches may be allowed under the relief, but they leave your remaining lots completely different from the exchange’s records.
Some experts have pointed out that once this divergence occurs, it may be difficult to reconcile later.
If you reported selling a specific lot in 2026 using your own records, switching back to the exchange’s version in later years could create inconsistencies in your reporting history.
Without a standardized cost basis transfer system between centralized exchanges and self-custody wallets (akin to ACATS for tradfi brokers), this problem isn’t going to be easily resolved.
Can I switch accounting methods under the new IRS regulations?
Yes. Under the latest notice, taxpayers can identify which crypto units they sold using their own records.
The temporary rule applies only if the asset is held by a broker/exchange and happens within the dates granted by the relief.
You can identify coins using things like:
purchase date
purchase price
wallet/account records
transaction IDs
As long as it’s recorded by the time of the sale. So you can’t go back and amend after the fact.
Under Spec ID, you can dispose of your assets in whichever order you wish.
You can do this by:
Option 1: Record the specific units
Write in your records which coins were sold using details like:
purchase date
purchase price
transaction ID
Option 2: Create a standing rule
Example rules you record in advance:
sell highest cost basis first (HIFO)
sell latest purchased coins first (LIFO)
Switching accounting methods in your crypto tax software without proper configuration may cause errors. If you want to switch accounting methods in Koinly, you can check out our help guide on cost basis method migration.
Koinly can help
Notice 2026-20 doesn’t necessarily create a problem on its own. In many cases, the relief simply allows taxpayers to report transactions more accurately using their own records.
But it does highlight an important reality of crypto tax reporting: your own records are critical.
Crypto tax software like Koinly can help automate this process and remove the majority of the administrative burden from users.
Track your complete portfolio throughout the financial year and generate tax reports when you need them.
