Last Updated on May 17, 2026 by Patrick Camuso, CPA
Quick answer (read this first):
What IRS Notice 2026-20 does: Extends through December 31, 2026, the temporary relief first granted under Notice 2025-7, allowing taxpayers to satisfy the adequate identification requirement for broker-held digital assets through their own books and records rather than through direct broker communication.
Why the IRS issued it: Most custodial brokers still do not have the technology infrastructure to accept specific identification instructions from customers at the time of each transaction, even as Form 1099-DA gross proceeds reporting went live for 2025 transactions.
The 2026 complication: Broker basis reporting for covered assets is now live. For 2026 transactions, the basis a broker reports to the IRS may not match what the taxpayer identified on their own books. The IRS explicitly acknowledges this mismatch is expected and confirms that the taxpayer’s books and records control, and the mismatch creates a reconciliation obligation the taxpayer must be prepared to document.
What happens after: Once the relief period ends, likely December 31, 2026, the books-and-records approach will no longer be sufficient for broker-held accounts. Standing instructions must be communicated to and processed by the broker before each sale.
Adequate Identification Requirement Under Treas. Reg. §1.1012-1(j)
Under Treas. Reg. §1.1012-1(j), which applies to all acquisitions and dispositions of digital assets on or after January 1, 2025, digital asset basis is tracked and applied at the wallet or account level. When a taxpayer holds multiple units of the same digital asset in a broker-held account at different acquisition dates or prices, those units must be individually identified when sold.
Under the permanent rule in Treas. Reg. §1.1012-1(j)(3)(ii), adequate identification for broker-held units requires the taxpayer to communicate to the custodial broker, no later than the date and time of the transaction, the specific units being sold, disposed of, or transferred. That communication can be a transaction-level instruction or a standing order on file with the broker directing lot selection in a defined manner. Without adequate identification, the default FIFO rule applies which means units are treated as sold in order of acquisition from earliest to most recent.
The infrastructure to satisfy this requirement, meaning broker systems that can accept, process, and record customer-level specific identification instructions in real time, is not yet fully operational at most custodial brokers. Notice 2025-7 acknowledged this in January 2025 and provided one year of transitional relief. Notice 2026-20 extends that relief through December 31, 2026, for the same reason.
Relief Provided Under Notice 2026-20
The notice extends the relief period defined in Notice 2025-7 to cover the period beginning January 1, 2025, and ending December 31, 2026. During that period, for units of digital assets held in the custody of a broker, a taxpayer may satisfy the adequate identification requirement through either of two alternative methods without communicating to the broker.
The first is transaction-level identification recorded in the taxpayer’s own books and records. The taxpayer identifies, no later than the date and time of the sale, disposition, or transfer, the particular units to be sold by reference to any identifier, such as purchase date and time or purchase price, that is sufficient to establish the basis and holding period of those units. The second is a standing order recorded in the taxpayer’s own books and records. The taxpayer records a standing order directing lot selection in a defined manner, such as highest-basis first or most-recently-acquired first, provided that the standing order is sufficiently specific to identify the basis and holding period of the units treated as sold and is recorded before the relevant units are sold, disposed of, or transferred. In either case, no communication to the broker is required during the relief period.
Both methods locate the responsibility with the taxpayer’s own contemporaneous documentation. The relief does not eliminate the documentation obligation; that obligation remains unchanged. It relocates the documentation from the broker communication layer to the taxpayer’s internal records.
The 2026 Reporting Environment: Basis Mismatch as an Expected Condition
Notice 2025-7’s relief applied in a year when brokers were reporting only gross proceeds, not cost basis. The basis side of the reporting equation was entirely in the taxpayer’s hands.
Beginning with 2026 transactions, brokers are required to report adjusted basis for covered assets on Form 1099-DA. This means the IRS will receive two numbers for 2026 disposals of covered lots including the basis the broker calculated using its own system, and the gain or loss the taxpayer reports on the return. Where those diverge, because the taxpayer identified a different lot on their books than the broker applied in its reporting, a discrepancy exists in the IRS matching system. Section 4.05 of Notice 2026-20 states that if a taxpayer makes an adequate identification on their books and records during the relief period, those are the units treated as sold for federal income tax purposes, regardless of whether the broker’s reported information matches.
Taxpayers using specific identification or HIFO-ordered lot selection in 2026 should expect their broker’s 1099-DA basis figures to differ from what their own records reflect. That expected mismatch does not create additional tax liability and the taxpayer’s books control but it creates a reconciliation obligation. Any difference between the broker-reported basis on Form 1099-DA and the basis reflected on the return must be explainable and documentable if the IRS follows up.
Lot Pool Divergence and the Consistency Constraint
A structural consequence of Notice 2026-20 has received limited attention in public commentary. When a taxpayer uses HIFO or LIFO on their own books in 2026 while the broker defaults to FIFO, the lot pools diverge immediately and permanently. The remaining lots on the taxpayer’s books after each sale are different lots, with different acquisition dates and different basis, than what the broker believes remains in the account.
A simple illustration, a taxpayer holds six ETH lots acquired at different prices throughout 2026 and sells three of them. Under HIFO on the taxpayer’s books, the three highest-basis lots are relieved. Under the broker’s FIFO default, the three earliest-acquired lots are relieved. After the sales, the taxpayer’s books show the three earliest-acquired (lower-basis) lots remaining. The broker’s records show the three highest-basis lots remaining.
In 2027, when the relief ends and the broker’s 1099-DA reflects basis calculated from its own lot pool, the broker will report basis for lots the taxpayer has already identified and disposed of on a different basis in 2026. The taxpayer cannot switch back to the broker’s view without filing an inconsistent return. The 2026 return already identified and reported specific lots as sold, and those lot identifications cannot be retroactively revised. Once the 2026 return is filed using the taxpayer’s own lot identification, the remaining lot pool on the taxpayer’s books becomes the only defensible starting point for 2027 and subsequent years. The broker’s lot pool is no longer reconcilable with the taxpayer’s filed position.
Form 1099-DA becomes a starting point to adjust from, not a target to conform to. For any taxpayer who uses a different lot identification method than their broker in 2026, which includes every investor whose software selects lots differently than the broker’s FIFO default,the 1099-DA will reflect different lots than the return reports. The mechanism for handling this on the return is Form 8949 where the taxpayer reports the proceeds from the 1099-DA, enters the correct basis from their own records, and uses adjustment Code B to indicate that the reported basis is incorrect. The difference is plugged in the adjustment column, and the taxpayer’s correct gain or loss flows to Schedule D. For a detailed walkthrough of how Form 8949 reconciliation works when 1099-DA basis differs from the taxpayer’s own records, see our guide on what to do after receiving a Form 1099-DA.
Reporting via Form 8949 adjustment codes is the prescribed mechanism for reporting when broker-reported basis does not reflect the taxpayer’s actual position. But it requires that the taxpayer’s lot-level records are complete, contemporaneous, and consistent. Those records are what the adjustment is based on and what must be produced if the IRS follows up.
Scope and Limits of the Relief
Notice 2026-20 does not eliminate any tax obligation. The relief changes which lot is treated as sold, and therefore how much gain or loss is recognized, but it does not reduce the amount of tax owed once that determination is made correctly. Contemporaneous records showing which lots were identified, whether transaction-level designations or standing orders recorded before each sale, are still required. The notice shifts where those records must exist, from broker systems to the taxpayer’s internal books, but it does not reduce the quality or timing standard that those records must meet.
The relief applies only to broker-held positions, any digital asset not held in the custody of a custodial broker falls outside the scope of the notice entirely. For self-custody wallets and non-custodial environments, the permanent adequate identification rules under Treas. Reg. §1.1012-1(j)(1) and (2) apply without modification. The FIFO default also remains in full force for any broker-held lot where the taxpayer fails to make a contemporaneous identification on their own books and records. Reliance on the relief does not carry forward beyond December 31, 2026. Taxpayers may not use the books-and-records alternative for sales, dispositions, or transfers occurring after the relief period ends, absent further IRS action.
The Post-Relief Environment and the Permanent Rule
The IRS has indicated that many custodial brokers are expected to complete building and implementing the systems necessary to accept and process specific identification instructions from customers during 2026. The implication is that Notice 2026-20 is likely the final extension and that the permanent rule will apply for 2027 and subsequent years.
Under the permanent rule, adequate identification for broker-held units requires the taxpayer to communicate the specific lot identification to the broker no later than the date and time of the transaction. A standing order communicated to and processed by the broker satisfies this requirement. A standing order recorded only in the taxpayer’s own books and records, without broker communication, does not.
For taxpayers who have been relying on the books-and-records alternative throughout 2025 and 2026, the operational shift before January 1, 2027, involves several practical steps. First, confirming that the custodial broker offers a mechanism to accept standing orders or transaction-level lot identification instructions. Second, establishing the appropriate standing order, typically a HIFO, LIFO, or other defined lot selection rule, with the broker before the first 2027 transaction executes. Third, verifying that the broker’s system is recording and processing the standing order correctly and that the basis it reports aligns with the taxpayer’s intended lot selection approach.
For investors whose brokers do not yet offer standing order functionality by the time the relief ends, the options are limited: wait for broker system readiness, transact from accounts where broker standing orders are operational, or accept FIFO as the applicable method for positions at that custodian.
Documentation Standards and Examination Exposure During the Relief Period
Notice 2026-20 does not eliminate examination exposure for taxpayers using specific identification or HIFO-ordered lot selection in 2026. The IRS has acknowledged that mismatches will exist but has not committed to treating those mismatches as automatically benign.
An examiner reviewing a 2026 return can request documentation showing that adequate identification was made on the taxpayer’s books and records before each disposal. That documentation must demonstrate the specific units identified, the method by which they were selected, the timing of the identification relative to the transaction, and consistency of the approach across all relevant transactions in the account. Consistency is a distinct examination focus: an examiner can assert that a taxpayer who applied HIFO to some disposals but not others, or who changed the standing order mid-year without documentation, did not make valid adequate identification for the inconsistently treated transactions.
Where that documentation does not exist, where the taxpayer’s HIFO results are the product of software output rather than contemporaneous lot-level identification records, the IRS can assert that adequate identification was not made and apply FIFO. The tax exposure from that assertion depends on the spread between the HIFO and FIFO outcomes. For portfolios with significant basis variation across lots, the exposure can be material.
The relief is only as valuable as the underlying documentation. Without contemporaneous identification records, a taxpayer is not using HIFO. They are using undocumented FIFO and reporting HIFO results.
Operational Implications for Taxpayers and Advisors
For any broker-held account where specific identification is being used in 2026, the standing order or transaction-level identification must be recorded in the taxpayer’s books before the relevant transaction executes. If a standing order is in place in accounting software or directly in the broker account, the investor should confirm that it was recorded before the first 2026 transaction, that it is sufficiently specific to identify which lots are treated as sold by reference to acquisition date, price, or another recognized identifier, and that the software is generating contemporaneous lot-level identification records rather than simply displaying HIFO totals on a summary report. Software that shows HIFO results without generating underlying lot identification records does not satisfy adequate identification even under the relief. For a deeper explanation of why software output is not a defensible tax position, see our article on why crypto tax software fails with historical portfolios.
For 2026 transactions involving covered assets, the basis reported by the broker on Form 1099-DA will likely differ from the taxpayer’s own lot identification. The mechanism for handling this on the return is Form 8949. The taxpayer reports the proceeds from the 1099-DA, enters the correct basis from their own lot-level records, and uses adjustment Code B in column (f) to indicate that the reported basis is incorrect. The difference is entered in the adjustment column. Every line where the 1099-DA basis differs from the return should be supported by documentation explaining the specific lot identified and why the taxpayer’s records control. Where the aggregate amounts are material, engagement with a qualified crypto CPA before filing is advisable.
For taxpayers whose brokers have not yet implemented standing order functionality, three options exist as the relief period ends, wait for broker system readiness, execute 2027 activity through accounts at custodians where standing order processing is operational, or accept FIFO as the applicable method for positions at that custodian. The appropriate posture depends on the account’s lot composition, the spread between FIFO and alternative method outcomes, and whether the investor’s documentation infrastructure supports the requirements of the permanent rule. Planning for this operational shift before December 31, 2026 is substantially simpler than addressing it after the first 2027 transactions have already executed under uncertain lot identification.
Self-custody wallet positions are not affected by the notice. Adequate identification for non-broker-held digital assets has always required taxpayer-maintained records under Treas. Reg. §1.1012-1(j)(1) and (2), and the documentation standard for those positions remains unchanged.
For a full breakdown of how specific identification, HIFO, and standing orders work under the final digital asset regulations, see our guide to the best crypto cost basis method. For the mechanics of how Form 1099-DA reporting works and how broker-reported basis interacts with taxpayer lot identification, see our IRS Form 1099-DA guide. For investors navigating the first active 1099-DA filing season, see our 1099-DA compliance services. For investors whose historical lot inventory requires reconstruction before adequate identification produces accurate results, see our crypto cost basis reconstruction services and complete reconstruction guide. For the Rev. Proc. 2024-28 transition mechanics that interact with Notice 2026-20, see our Rev. Proc. 2024-28 analysis. Work with a crypto CPA established in this market since 2016.
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Frequently Asked Questions
What does Notice 2026-20 actually change for crypto investors?
It extends through December 31, 2026, the ability to use books-and-records identification rather than broker communication to satisfy the adequate identification requirement for broker-held digital assets. In practice, this means taxpayers can continue using their own accounting software or records to identify which lots are sold, using HIFO, LIFO, or specific lot selection, without needing the broker to have accepted and processed a standing order instruction. The documentation obligation shifts to the taxpayer’s own books, and the documentation standard is unchanged.
Do I need to notify my broker to use HIFO in 2026?
No, during the Notice 2026-20 relief period. Through December 31, 2026, the adequate identification requirement for broker-held positions can be satisfied by recording the lot identification in the taxpayer’s own books and records before the transaction, without communicating to the broker. After December 31, 2026, the permanent rule applies, and broker communication will likely be required.
My 1099-DA shows different basis than my software. Which is correct?
Under Notice 2026-20, the taxpayer’s books and records control. If adequate identification was made on the taxpayer’s books before the disposal, those are the units treated as sold for federal income tax purposes, regardless of what the broker reported. The mismatch must be documented and explainable in the event of IRS follow-up.
Does Notice 2026-20 apply to my Coinbase or Kraken account?
It applies to digital assets held in the custody of a custodial broker, which includes most major U.S.-based centralized exchanges. It does not apply to positions held in self-custody wallets, hardware wallets, or non-custodial environments, regardless of which exchange or platform the assets originated from.
What if my broker only offers one lot selection method?
Under the final regulations, if a custodial broker offers taxpayers only one method of making a specific identification, for example highest-basis first, that is treated as a standing order or instruction made by the taxpayer at the time of each sale. If a taxpayer makes an adequate identification under the notice using their own books and records, this single-method rule does not apply.
Is Notice 2026-20 likely to be extended again for 2027?
The IRS has indicated that brokers are expected to complete the systems necessary to support real-time specific identification during 2026. The framing of the notice suggests it is intended as the final extension before the permanent rule takes effect. Taxpayers should plan operationally for the permanent rule to apply for 2027 transactions and not assume another extension will follow.
What is the risk if I report HIFO results but don’t have lot-level documentation?
If adequate identification cannot be demonstrated through contemporaneous books and records, the IRS can apply FIFO to the positions at issue. The tax exposure equals the difference between the HIFO and FIFO outcomes for those positions, plus potential accuracy-related penalties. The notice does not protect positions where documentation is absent. It protects positions where documentation exists in the taxpayer’s books, even if the broker was not involved.
If I use a different method than my broker in 2026, what happens to my lot records going into 2027?
When a taxpayer uses HIFO or LIFO on their own books while the broker defaults to FIFO, the remaining lot pools diverge after each sale. The lots the taxpayer has identified as remaining are different from the lots the broker believes are remaining. In 2027, when the broker’s 1099-DA is calculated from its own lot pool, it will reference lots that differ from the taxpayer’s records. The taxpayer cannot switch back to the broker’s view without filing an inconsistent return, because the 2026 return already identified specific lots as sold under the taxpayer’s method. The taxpayer’s books become the controlling record going forward, and Form 8949 adjustment codes are the mechanism for reconciling the difference against the broker’s reporting each year.
How do I report on Form 8949 when my basis differs from the 1099-DA?
Report the proceeds shown on the 1099-DA, enter the correct basis from your own lot-level records in the basis column, and use adjustment Code B in column (f) to indicate the reported basis is incorrect. Enter the difference between the broker-reported basis and your correct basis in the adjustment column (g). The corrected gain or loss flows through to Schedule D. Retain the lot-level documentation explaining every adjustment. This is the prescribed mechanism for reporting when broker-reported basis does not match the taxpayer’s actual position. It is not a workaround, but it requires that the underlying lot records are complete, contemporaneous, and consistent.
