For tax professionals managing clients with digital asset portfolios, the regulatory framework governing basis tracking has seen recent critical updates. Under IRC § 1012(c)(1), "in the case of the sale, exchange, or other disposition of a specified security on or after the applicable date, the conventions prescribed by regulations under that section must be applied on an account-by-account basis". To that end, final regulations issued in T.D. 10000 established ordering rules for determining which units of a digital asset are treated as sold when a taxpayer holds multiple units acquired at different times or prices.

Under Treas. Reg. § 1.1012-1(j)(3)(ii), when digital assets are held in the custody of a broker, "adequate identification is made if, no later than the date and time of the sale, disposition, or transfer, the taxpayer specifies to the custodial broker with custody of the digital assets the particular units of the digital asset to be sold, disposed of, or transferred". If a taxpayer fails to make this adequate identification to the broker, Treas. Reg. § 1.1012-1(j)(3)(i) mandates a strict "FIFO rule," treating units as sold "in order of time from the earliest date on which units of that same digital asset held in the custody of the broker were acquired by the taxpayer".

Recognizing that brokers were not technologically prepared to accept these specific identification instructions by the January 1, 2025, effective date, the IRS previously issued Notice 2025-7, which temporarily relieved taxpayers of the requirement to communicate identifications directly to their broker during the 2025 calendar year. Notice 2026-20 "extends the temporary relief provided in section 4.02 of Notice 2025-7... for an additional year".

Reason for the Extension

The extension granted in Notice 2026-20 is a direct response to ongoing technological limitations within the digital asset brokerage industry. While "certain digital asset custodial brokers have informed the Treasury Department and the IRS that they have built and implemented systems and procedures to report gross proceeds for digital asset transactions carried out in 2025," these same institutions are lagging in basis tracking functionalities.

The Notice explains that many custodial brokers "are not currently ready to accept specific identifications (other than standing orders) from customers". Although brokers are "expected to complete building and implementing the systems necessary to do so during 2026," failing to extend the relief would mean that "some taxpayers may be temporarily unable to make adequate identifications in conformity with § 1.1012-1(j)(3)(ii)". Without further intervention, "any units in the custody of such brokers that are sold, disposed of, or transferred before the necessary systems are in place would be determined under the FIFO rule". To prevent this adverse result for taxpayers, the IRS issued Notice 2026-20 to extend the relief.

Details of the Notice

Notice 2026-20 redefines the "relief period" as "the period beginning on January 1, 2025, and ending on December 31, 2026". During this window, eligible taxpayers may bypass the requirement to communicate lot selections to their broker. Instead, a taxpayer may make an adequate identification by leveraging their own internal books and records in one of two ways:

First, by "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".

Second, by "Recording 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".

As a caveat, this temporary relief is exclusively for assets "held in the custody of a broker" and "does not apply to digital asset units not held in the custody of a broker". Additionally, for taxpayers utilizing the basis allocation safe harbor found in Rev. Proc. 2024-28, they "may rely on the temporary relief described in section 4.02 of this notice only after the applicable requirements of Rev. Proc. 2024-28 have been satisfied".

Modifications from Notice 2025-7

Notice 2026-20 officially modifies Notice 2025-7. Aside from the primary modification of extending the relief period through December 31, 2026, Notice 2026-20 introduces a highly critical new provision for tax practitioners under Section 4.05, titled "Adequate Identification."

Because broker 1099-DA reporting for 2026 will be active while this relief period allows taxpayers to maintain separate books and records for lot identification, a documentation mismatch is virtually guaranteed. The IRS explicitly acknowledges that "for 2026 transactions, the acquisition date and basis reported by a broker to a taxpayer with respect to a sale, disposition or transfer of digital assets may not match the lot identification and basis of that sale, disposition or transfer on the taxpayer’s books and records".

To cure this discrepancy, Section 4.05 dictates that "If the taxpayer has made an adequate identification on its books and records of the digital asset units sold, disposed of or transferred during 2026...for Federal income tax purposes the units sold, disposed of or transferred by the taxpayer are the ones identified in the taxpayer’s books and records regardless of whether the information reported by the broker to the taxpayer matches the taxpayer’s books and records". Conversely, if the taxpayer did actually specify the units to their broker, "for Federal income tax purposes the units sold, disposed of or transferred by the taxpayer are the ones specified by the taxpayer to the broker".

This modification places the ultimate burden of proof heavily on the taxpayer’s contemporaneous internal recordkeeping. Tax professionals must ensure their clients are rigorously documenting their lot selections or standing orders on their own books and records prior to execution, as those records will supersede the broker’s Form 1099-DA reporting during the extended relief period.

Prepared with assistance from NotebookLM.