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Starting January 1, 2025, the IRS is implementing significant changes to how digital assets must be tracked and reported for tax purposes. The most notable change: taxpayers can no longer use the "universal wallet approach" – treating all their digital assets as if held in a single account, regardless of their actual location.
Previously, taxpayers could track their digital assets across multiple wallets and exchanges as if they were all in one account. This flexibility allowed for simplified basis tracking and strategic tax planning. Under the new regulations, each wallet and broker account must be treated separately.
Broker-held Assets: Without specific identification at the time of sale, brokers must use the First-In, First-Out (FIFO) method to track basis.
Self-custodied Assets: Taxpayers can establish standing rules in their records to identify which units are being sold, provided these rules clearly document which assets are being removed from the account.
The IRS recognizes the complexity of this change and has provided relief through Rev. Proc. 2024-28 to provide taxpayers a safe harbor to assist in transitioning to the multiple-wallet or account basis tracking. Subject to certain limitations, taxpayers may reasonably allocate their remaining unused basis to any wallet or account prior to January 1, 2025.
The safe harbor is available only to taxpayers who hold digital asset units that they:
Acquire or receive in a transfer prior to January 1, 2025, and
Hold in their wallet or account as of January 1, 2025.
The safe harbor does not apply to any digital assets acquired by or transferred to the taxpayer on or after January 1, 2025.
Taxpayers are permitted to make reasonable allocations of units of cost basis among digital asset units held prior to January 1, 2025, IF the following requirements of the revenue procedure are met:
Each remaining digital asset unit must be a capital asset in the hands of the taxpayer.
Each unit of unused basis must have been originally attached to a digital asset unit that was a capital asset in the hands of a taxpayer.
The digital asset unit from which the unused basis is derived and the remaining digital asset unit must be the same type.
The taxpayer must be able to identify and maintain records sufficient to show the total number of remaining digital asset units in each of the wallets or accounts held by the taxpayer.
The taxpayer must be able to identify and maintain records sufficient to show the number of units of unused basis, original cost basis of each unit of unused basis, and the acquisition date of the digital asset unit to which the unused basis was originally attached.
A taxpayer must treat any allocation under the revenue procedure as irrevocable for all purposes of Section 1012.
Digital asset management traditionally relies on multiple addresses for:
Regular transactions (laptop wallets)
Mobile access
Cold storage for long-term holdings
Risk management
Transaction categorization
The new regulations require separate tracking for each address, significantly increasing the complexity of asset management and reporting.
Basis tracking must now be address-specific
Existing tax software may need substantial updates
Transaction history must be maintained separately for each wallet
Real-time specific identification becomes crucial
Review current account structures and usage patterns
Develop clear documentation procedures for each wallet
Establish specific identification protocols
Assess current tax reporting software capabilities
Evaluate the need for new tracking systems
Document standing rules for self-custodied assets
Plan for potential operational changes in transaction processing
Consider the impact on transaction flexibility and reporting efficiency
These changes represent a fundamental shift in digital asset tax reporting. While the previous system offered flexibility in basis allocation and tax planning, the new regulations prioritize precise tracking and documentation. This shift aligns digital asset reporting more closely with traditional securities but creates unique challenges given the decentralized nature of digital assets.
Organizations and individuals must adapt their digital asset management strategies to comply with these new requirements while maintaining operational efficiency. This may require significant changes to existing processes and potentially new technological solutions.
The transition period leading up to January 1, 2025, provides a crucial window for taxpayers to prepare their systems and procedures for compliance with these new regulations.
These software options allow for wallet-based cost tracking.
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