Specific Identification of Crypto Lots: Standing Orders and the 2025 and 2026 Relief

Specific identification is the most valuable tax tool a crypto investor has that costs nothing. It is also the one most often lost on a technicality, because the rule has a clock attached to it.

Under Treas. Reg. 1.1012-1(j), the identification has to be made no later than the date and time of the sale, disposition or transfer. Not at year end. Not when the preparer asks. At the moment the units leave. This guide covers how to make a valid identification for exchange accounts and self-custody wallets, why a standing order is the practical answer, and how the IRS relief in Notice 2025-7 and Notice 2026-20 changes the mechanics through the end of 2026.

Why identification matters

When you own several lots of the same coin at different costs, identification decides which cost comes off against your sale price, and which holding period applies. Without a valid identification, the regulation applies first in, first out within the wallet or account. Sometimes FIFO is fine. Often, with assets that rose for years and then pulled back, FIFO pushes out your cheapest, oldest units first and maximizes the gain you report.

For the basics of how basis and methods work, start with crypto cost basis methods.

Self-custody wallets: identify on your books

For units not held by a broker, such as a hardware wallet or a wallet app you control, Treas. Reg. 1.1012-1(j)(2) says a specific identification is made if, no later than the date and time of the sale, disposition or transfer, you identify on your books and records the particular units by reference to an identifier, such as purchase date and time or purchase price, that is sufficient to identify the units.

The regulation adds a condition: you can make a specific identification only if you keep adequate records for that asset in that wallet to establish that a unit you identify was removed from it.

The regulation's own Example 1 is useful. A taxpayer moved two lots into a new unhosted wallet: 10 units bought for $2 each and 20 units bought for $5 each. The next day the taxpayer used 10 units to buy $100 of goods through a payment processor, a transaction treated as a sale. Before the transfer, the taxpayer noted in their records that the 10 units came from the $5 lot. That note was a valid specific identification, so the basis was $5 per unit and the holding period was one year or less. Example 2 changes one fact: no record was made at or before the time of sale. FIFO applied, and the $2 units went out first.

A dated note in a ledger, a spreadsheet entry with a timestamp, or a recorded standing rule all work if they are made in time and identify the units clearly. A memory does not.

Exchange accounts: adequate identification to the broker

For units in the custody of a broker, Treas. Reg. 1.1012-1(j)(3)(ii) requires an adequate identification: you tell the broker, no later than the date and time of the sale, which units to sell, using an identifier the broker designates as sufficiently specific. You are responsible for keeping records that substantiate the identification.

Three special rules in that paragraph matter in practice:

• A standing order or instruction for specific identification is treated as an adequate identification made at the time of sale.
• If a broker offers only one method of specific identification, that method is treated as your standing order.
• When a broker withholds units from a crypto-for-crypto exchange to pay its fee or for backup withholding, you are deemed to have identified the withheld units as coming from the units received in the exchange, under 1.1012-1(j)(3)(iii).

The relief: Notice 2025-7 and Notice 2026-20

Many brokers did not have systems in place on January 1, 2025, to accept lot instructions from customers. The IRS acknowledged this in Notice 2025-7 and gave temporary relief for calendar year 2025. In April 2026, Notice 2026-20 extended the relief period through December 31, 2026.

During the relief period, for units held in the custody of a broker, you may make an adequate identification in either of two ways besides telling the broker:

• Identify the particular units on your own books and records, no later than the date and time of the sale, by an identifier sufficient to establish basis and holding period; or
• Record a standing order on your own books and records, entered before the units it covers are sold, with enough information to identify any units sold.

If you identify units this way, the rule treating a broker's single offered method as your standing order does not apply to you during the relief period. The relief covers only units held by a broker. It does nothing for self-custody wallets, which already use the books-and-records rule.

Notice 2026-20 also added a clarification that matters at filing time. If you properly identified units on your books during 2026, those are the units you sold for federal income tax purposes, even if the information the broker reports does not match. The notice says expressly that the relief does not apply to the broker reporting rules, so the acquisition date and basis on your Form 1099-DA may differ from your records. You report the correct numbers and reconcile the difference. See Form 1099-DA explained.

Taxpayers relying on the Rev. Proc. 2024-28 transition safe harbor can use the relief only after meeting that procedure's requirements, including completing a global allocation if they chose one. See the Rev. Proc. 2024-28 guide.

After the relief ends

Unless the IRS extends it again, the relief stops for sales after December 31, 2026. From then on, for units at a broker, you will need to communicate identifications or standing orders to the broker in the way the broker designates. Watch for each exchange's lot selection settings, and confirm what your account is set to before you trade in 2027.

How to write a standing order that holds up

A standing order is a rule decided in advance. Write it so a stranger could apply it to your records and reach the same answer. A workable example for an exchange account: for all dispositions of [asset] from [exchange] account ending [digits], dispose first of the units with the highest cost per unit; if units have equal cost, dispose first of the units with the earliest acquisition date and time.

• Date it, and save it somewhere with a reliable timestamp.
• Make one for each wallet and each account. Rules are applied wallet by wallet.
• Keep the lot ledger that makes the rule work: acquisition date and time, quantity, cost and fees for every lot.
• If you change the rule, record the new version before the next sale. Under 1.1012-1(j)(4), changing how you identify units is not a change in accounting method.

A worked example with a standing order

Say you hold three lots of a coin at one exchange: 1 unit bought in 2020 for $9,000, 1 unit bought in 2022 for $40,000, and 1 unit bought in 2025 for $95,000. On February 1, 2026, before any 2026 sale, you record in your own ledger a standing order for that account: highest cost first, then earliest date.

In August 2026 you sell 1 unit for $70,000. Under your standing order, the 2025 unit at $95,000 is the one sold, producing a $25,000 loss. If the 2025 unit was bought within one year of the August sale, the loss is short-term; if not, long-term. Without the standing order, FIFO would have sent out the 2020 unit and produced a $61,000 long-term gain.

Now suppose the exchange's Form 1099-DA for 2026 shows basis on a FIFO basis. Under Notice 2026-20, your properly recorded identification controls, so you report the sale with the correct basis and use the Form 8949 adjustment for a basis that differs from what the broker reported. Keep the dated standing order with your return records. It is the document that explains the difference.

Common failure points

• Making the choice in tax software after year end. Too late.
• One rule for everything. A global instruction that ignores which wallet held the units does not match how the regulation works.
• No lot ledger. Without adequate records, the self-custody identification rule is unavailable.
• Ignoring income lots. Rewards and airdrops are lots too, with their own dates and basis.

Specific identification rewards people who decide first and trade second. Make the decision once, write it down, and let it work for you every time you sell.

Frequently asked questions