IRS Extends Temporary Relief for Digital Asset Cost Basis Allocation, United States, March 2026

The Internal Revenue Service issued Notice 2026-20 on March 17, 2026, extending temporary relief under Treasury Regulation § 1.1012-1(j)(3)(ii) for taxpayers who hold digital assets through custodial accounts. The notice extends the deadline by which brokers and taxpayers must implement the specific identification method for allocating cost basis in digital asset dispositions. The relief is transitional and applies only to the period specified in the notice; it does not permanently modify the cost basis accounting rules applicable to digital assets.

The controlling authority is Treasury Regulation § 1.1012-1(j), promulgated under Internal Revenue Code § 1012, which requires taxpayers to use an adequate identification method when disposing of securities or digital assets held in custodial accounts. Subparagraph (j)(3)(ii) of the regulation specifies the mechanics for standing orders and default allocation methods applicable to digital assets. Notice 2026-20 invokes the IRS's authority under IRC § 7805(b) to provide transitional relief, permitting taxpayers to continue using the first-in, first-out default method for custodial digital asset accounts during the extension period without penalty for failure to adopt specific identification.

Digital asset brokers — including cryptocurrency exchanges and custodial wallet providers — who are subject to the Form 1099-DA reporting rules must assess whether the extension period in Notice 2026-20 covers their current system configurations for cost basis tracking. Taxpayers who hold digital assets in custodial accounts and plan to dispose of those assets during the extension period may continue to rely on the FIFO default without adopting a specific identification standing order, provided they comply with the conditions stated in the notice. Self-custody wallet holders are unaffected by the custodial broker rules in § 1.1012-1(j) and must apply general IRC § 1012 principles independently.

Notice 2026-20 does not affect the underlying requirement to adopt specific identification once the extension period expires, nor does it modify the Form 1099-DA filing deadlines set in the final broker digital asset reporting regulations. Taxpayers and brokers must monitor IRS guidance for any further extension or final rule addressing permanent implementation of § 1.1012-1(j)(3)(ii), as the current relief is expressly temporary. The notice provides no safe harbor for brokers who have already implemented systems inconsistent with the regulation.

Prokopiev Law Group advises digital asset brokers, custodial platforms, and taxpayers on U.S. federal tax compliance for digital asset transactions, and maintains a dedicated partner network for tax counsel on IRS reporting obligations. Contact us to discuss how Notice 2026-20 affects your reporting and cost basis systems. Areas we handle and assign through our network include: digital asset tax compliance, broker reporting obligations, Form 1099-DA implementation, cost basis accounting for crypto, IRS notice analysis, and digital asset regulatory counsel.

Source: IRS Notice 2026-20, "Extension of Temporary Relief Under Section 1.1012-1(j)(3)(ii)," Internal Revenue Service, March 17, 2026, https://www.irs.gov/pub/irs-drop/n-26-20.pdf. Confirmed March 26, 2026.

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