Welcome Avatar! This is a bonus guest post (standard paid post on Wednesday Night still coming) since we know we’re at tax deadline. For those that need an update we have a CPA here who does nothing buy crypto taxes. Best to get this info from someone who is in the weeds all day every day.
Justin is a CPA who does nothing but crypto tax.
The relevance here is that the extension deadline is this week (Oct 15), and we’re only a few months away from the end of the year.
As a reminder, using tax software makes it easier to keep good records - our tax partner is Summ (same as always). You can access Summ HERE and get 25% off your first year for being a BTB subscriber (code: BTB25). Yes this also operates as a ref link.
On that note, handing it over!
Intro
Hey US crypto investors,
2027 tax season is going to be a nightmare - are you ready?
Got your attention? I’m Justin, a CPA specializing in crypto tax. I’m currently working on product and tax strategy for Summ, BTB’s tax partner and I also mod r/CryptoTax.
Before you continue reading, I want to clarify that this post is aimed at US tax filers, as it is specifically about the recent changes to the IRS broker reporting rules and a problem I have discovered buried in IRS Notice 2026-20.
For those of you already glazing over, I will provide a TL;DR just below but it is important to understand that this will likely impact you next tax season, and understanding what I’m about to write will help you avoid a serious headache if the IRS ever comes knocking.
TL;DR
The IRS has recently introduced mandatory reporting for crypto exchanges on a new form called the 1099-DA. The first form covered tax year 2025, and only covered sales.
This meant that US taxpayers needed to fill in the cost basis information for the asset sales recorded on the 1099-DA based on their own records.
For 2025 and 2026, the IRS allowed taxpayers to rely on their own lot identification method (e.g. LIFO, HIFO etc) for your own filing, even if your exchange used something different.
Next year, the 1099-DAs covering tax year 2026 will report the cost basis of your assets, and will apply a default cost basis method, even if it differs from your own records.
Critically, the difference between the cost basis method used in previously filed tax years and the exchange’s default cost basis method in these new reports will create a “fork” in the records. Due to the IRS requiring you to be accurate and consistent in your returns, you won’t be able to adopt the exchange’s 1099-DA in its entirety, as it could contradict your past and future tax filings.
The solution for this is to maintain immaculate records using software or a well-built Excel spreadsheet, and make adjustments to the cost basis of your assets reported on the 1099-DA using Code B on your 8949.
Failing to do so could mean filing an inaccurate and/or inconsistent tax return, which could lead to some serious problems with the IRS down the track…
If you get the idea and want to stop there, the main message to take away is: keep clean records!
Some Things to Keep in Mind
Before I dive into the explanation of how the IRS rules are contradictory - I want you to keep in mind that the tax code is very clear on two things:
You have to file an accurate return (Section 6662, where the accuracy penalties live)
You have to keep consistent books and records to back that return up (Section 6001)
Pretty obvious, and something that’s been hammered into all of us. But, for us crypto investors, there is a fault in the system. Unlike equities, where brokers must pass the cost basis of your assets with them if you move between platforms (using the ACATS system), crypto exchanges are not required to do the same.
And for the majority of people in crypto, sending between exchanges and wallets is SIGNIFICANTLY more common than moving equities from one broker to another.
What the IRS Actually Said
For the 2025 and 2026 tax years, the IRS has allowed you to use your own records to decide which units of each currency you sold, even if the exchange records report something different.
For example, say you bought one BTC on Kraken for $1k in 2015 and then bought one BTC on Coinbase for $100k in 2025, then sent them to Gemini. You decide to sell one BTC on Gemini for $110k, you could nominate the BTC bought on Coinbase for $100k as the unit you disposed of so you could minimize your tax bill - a $10k gain instead of $109k if you’d nominated the Kraken coin.
This follows Notice 2026-20, Section 3.05, which essentially says you can make lot identifications on your own books and records “regardless of whether the information reported by the broker to the taxpayer matches the taxpayer identification”.
In practice, assuming its set before you make any disposals, you can use whatever cost basis method you want on your own books (FIFO, LIFO, HIFO, etc.), regardless of the method the exchange uses internally. The catch is you must meet lot identification requirements, which means you must be able to show which specific units you sold, at the time you sold them.
Using tax software means you should be able to meet these requirements, but if you’re throwing a bunch of screenshots into ChatGPT, you may have a few issues.
However, this is only temporary relief which ends on December 31, 2026. The problem is that while the relief is temporary, the divergence it creates in your records is permanent.
For anyone who wants the full detail, the relief sits under Treasury Regulation Section 1.1012-1(j)(3)(ii), and you can read the notice HERE.
Why Single-Exchange Users Are Affected Too
Until now this problem was mostly about transfers between exchanges or from wallet to exchange - moving your BTC from Coinbase to Gemini meant that Gemini had no idea what you paid for your BTC.
The new issue that is being introduced doesn’t even require you to transfer out of an exchange to be affected. In the example below, all of the assets were bought and sold on one exchange, and the 1099-DA reported by the exchange would still not match your records. This means that, even if you only used one exchange but chose a cost basis method different from the one used by default, you will still face issues.
Up until January 1, 2027, this doesn’t actually matter all too much if you keep your own records, because the IRS has permitted lot identifications based on your own books. However, once this relief expires, you’re stuck in a position where the exchange records that they are reporting to the IRS via the 1099-DA will go against what your records say.
A Simple Example
You buy monthly into ETH on Gemini throughout 2026:
Jan 15: 1 ETH @ $2,000
Feb 20: 1 ETH @ $2,200
Mar 10: 1 ETH @ $2,500
Apr 5: 1 ETH @ $1,800
May 15: 1 ETH @ $3,000
Jun 1: 1 ETH @ $2,700
Later in the year you sell 3 ETH:
Jul 10: 1 ETH @ $3,200
Aug 20: 1 ETH @ $3,500
Sep 15: 1 ETH @ $3,000
To level-set: when you buy units of an asset at a certain price, those units form a “lot”, with the price and date you bought at. So I will refer to buying X amount of ETH at a certain time in January as a “Jan lot”.
Gemini’s 1099-DA uses FIFO (first in, first out), which means it assumes the first ETH you bought is the first ETH you sold:
Jul 10: sold for $3,200, matched to the Jan purchase ($2,000) = $1,200 gain
Aug 20: sold for $3,500, matched to the Feb purchase ($2,200) = $1,300 gain
Sep 15: sold for $3,000, matched to the Mar purchase ($2,500) = $500 gain
Total gain: $3,000
So Gemini’s cost basis method leaves the 1099-DA thinking you still hold the April, May and June purchases.
But you decided you want to use a more tax efficient cost basis method, so you choose LIFO in your software at the beginning of the year to optimize the year’s tax return. Each sale matches to your most recent purchase:
Jul 10: sold for $3,200, matched to the Jun purchase ($2,700) = $500 gain
Aug 20: sold for $3,500, matched to the May purchase ($3,000) = $500 gain
Sep 15: sold for $3,000, matched to the Apr purchase ($1,800) = $1,200 gain
Total gain: $2,200
This gives you a lower tax bill legally (woohoo) but leaves your records showing you still hold the January, February and March lots of ETH. This completely differs from what Gemini believes you hold, despite both sets of records showing a remaining holding of 3 ETH (which is correct).
In this example, you can see just how messed up things can become with just one currency and a handful of buys and sells. Now imagine the scenario which many crypto investors would likely be in, which is hundreds or even thousands of different buys and sells across many different currencies, exchanges and wallets.
Those pools of assets basically become irreconcilable almost immediately, and as time goes on, the issue only gets worse and worse.
What Happens in 2027
Recall what I outlined in the beginning - the IRS is very clear on accuracy and consistency.
AND, there is no requirement for cost basis reporting between crypto exchanges.
You used LIFO in 2026, like the IRS said you could. Your return says you sold one set of lots, but Gemini is reporting you sold another set of lots, which shows $800 more in gains.
Now, imagine it’s 2027 and you sold one more ETH on Gemini. Gemini defaults to using FIFO, and still thinks you hold the April, May and June lots, so it matches your sale with a lot of ETH from April (when you paid $1,800 per ETH). The issue is that you already told the IRS you sold the April lot back in 2026 according to your own records, which used LIFO. Using your own records, you would make an adjustment and make this sale use the January lot instead.
Given you can’t sell the same asset lot twice, you’ve now got an inconsistent tax return and, if you adopt the 1099-DA as “the source of truth”, you will be breaking the IRS’ golden rules and creating a lot of red flags during filing.
So from here on, you’re FORCED to use your own records to file, because using Gemini’s version means reporting the April lot sale a second time, which is inaccurate and would cause issues with the IRS.
How to Fix It on Your 8949
To avoid breaking the IRS’ own rules of accuracy and consistency, it is my view that crypto investors are going to need to adopt their own records as the source of truth moving forward. While this might sound scary, the mechanics are quite simple:
Report the cost basis the 1099-DA shows
Use the adjustment column on Form 8949, with code B (basis shown on the form = incorrect)
Insert the difference between the DA and your records so that the basis reported on the 8949 reflects those shown by your own records
Using the Gemini example above, the 1099-DA would show a cost basis of $6,700 for your three sales, derived from your Jan, Feb and Mar lots of ETH. Your records would say it’s $7,500, derived from the Apr, May and Jun lots. So, to correct the discrepancy, you would use code B on your 8949, and enter an $800 adjustment (split across the sales if required) to the gain, bringing it down from $3,000 to $2,200, which is in line with your records.
What this means for crypto investors is that now more than ever it has become essential to keep extremely accurate, well-maintained records that you can use to justify any of your cost basis calculations if the IRS ever asks.
What About “Match Your 1099-DA or Else”?
Many people / companies have been peddling a narrative of “match your records to your 1099-DA or you’re screwed”. While this is true for equities due to the reliability of cost basis under the ACATS system, crypto has no cost basis reporting system between exchanges. Coins bought and held on the same exchange will be reported using the exchange’s default accounting method (usually FIFO), and anything transferred into an exchange that was bought or acquired elsewhere won’t have a cost basis reported at all. In both cases, only your own records can complete an accurate return.
If you know the exchange’s numbers don’t reflect your actual books, copying them breaks the IRS’ golden rule of accuracy - so you are actually better off just maintaining your own records than trying to blindly adopt the exchange’s 1099-DA.
To be clear, I’m not saying completely ignore the 1099-DA, but you will need to compare every line against your records and account for every difference. Just don’t treat it as gospel when it’s built on incomplete information that the IRS has allowed you to override for the past 2 years.
The Checklist
Before December 31, 2026:
Under Notice 2026-20, you can still use your own cost basis method (assuming you meet the lot selection rules, which software can help with)
Get your full lot history across every exchange and wallet into reputable software (like Summ) or a very well-built Excel spreadsheet
Keep your records clean and saved somewhere safe in case you need to access them later
When your 1099-DA arrives early next year:
Compare it against your records line by line
Where it doesn’t match, adjust it on Form 8949 using code B (which we’re planning to automate with Summ)
From 2027 onward:
The cost basis method gets set at the exchange level - you can nominate a method, or it will default to FIFO
Apply that method to your own lot records rather than the exchange’s, because the exchange’s lot data likely won’t line up if you reported using your own records in 2025 and 2026, or ever transferred assets
Keep adjusting on Form 8949 wherever the 1099-DA disagrees, and keep your records backed up in case you ever need to justify them to the IRS
What Should Change
In my opinion, the Treasury should make the self-reporting relief permanent, at least until there’s a standard for reporting cost basis between exchanges. Every year the relief stays temporary just makes the situation worse for everyone, because the records keep splitting while we wait for better guidance.
Longer term, I think we might see crypto exchanges trying to work more closely with crypto tax software to enable more accurate cost basis tracking to help avoid creating a tax nightmare for their users. The idea would be, just like equities, the cost basis would travel with your assets when moving them from one exchange to another. Unfortunately we’re not there yet, and may never get there, so every transfer in and out creates a gap in the data that only you can fill with well-maintained records.
Ideally the IRS clarifies things before the new year so taxpayers know where they stand. If you only take one thing away from this piece, make sure your records are in excellent shape before December 31 - whether that’s in software or an immaculate Excel spreadsheet.
BTB Notes
Once again, this post was written entirely by Justin, a CPA who is deep in the weeds of crypto taxes and the IRS’ recent changes.
Our key takeaway is the IRS has built a reporting system that assumes you never transfer your coins out of the exchange you purchased them on (which is essentially the whole point of crypto - not your keys, not your coins etc etc), and that you use the same cost basis method as the exchange, even though the IRS just let you choose your own.
Expect the form to disagree with your records, and keep exceptionally good records and you’ll avoid breaking the two golden rules: accuracy and consistency.
If you’ve got more than a handful of transactions / have used more than one exchange or wallet, don’t do this by hand. You want software that pulls in your full history across all exchanges and wallets, imports your 1099-DA and checks it against your own records, then shows you every difference and helps you report it on your 8949.
That’s why we’re partnered with Summ (link and BTB25 code HERE).
Good luck anon!
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